In this day of economic recession, businesses look for any way to increase their bottom line. With the rising cost of employee benefits and the sometimes onerous burden of employment taxes, businesses try to save money by “replacing” their employees with independent contractors and volunteers. Too often this “replacement” is facilitated by just changing the labor category of the worker from employee to independent contractor, even though the identity of the worker stays the same.
While this recategorization can save money for the business, it does the opposite for state and federal governments who utilize employment tax revenue to provide services for the general population. As such, many governments are cracking down on businesses who attempt to circumvent employment taxes by recategorizing employees as independent contractors or volunteers.
Under the Fair Labor Standards Act (FLSA) an employee is someone who is “engaged in interstate commerce or in the production of goods for commerce, or who is employed by an enterprise engaged in commerce or in the production of goods for commerce”, unless the employer can claim an exemption from coverage.” And there is considerable case law pointing out that categorizing a worker as an independent contractor, or a volunteer, does not make them so.
In determining what employment category a worker falls into, the court will review the total “economic reality” relationship between the worker and his/her employer. Though generally whether one is an employee or independent contractor/volunteer comes down to a determination of who is in control – the worker or employer – the court’s review will also focus on two other areas – the relationship and the financial circumstances.
Control (Behavior): Independent contractors (IC) exert control over their work. Though the business identifies what work is to be completed, an IC determines who will complete the work and is responsible for hiring these workers, how it will be completed including what tools, equipment, and supplies are used, where it will be completed, and when it will be completed to meet the deadline given by the business. If any special skills or training is required to complete the work, an IC is administratively and financially responsible for ensuring anyone working on the project meets this need. A court is more likely to find a worker is an employee and not an IC when the amount of detailed instruction given to complete the above is given to the worker.
Financial Circumstances: The IRS outlines five financial areas which go into determining whether a worker is an IC or employee – whether the worker has made a significant investment in the tools, equipment, and supplies needed to complete the project, whether the worker is reimbursed for their expenses, whether the worker can incur a profit or loss, whether the worker operates a business, pays taxes, and offers their services to the public, and how the worker is paid. Workers who engage in these five areas are often deemed IC.
The Relationship: In the relationship between a business and an IC, one generally finds a written contract spelling out the terms of the work required and when it is due. That the work to be performed is not a key aspect of the business and employee benefits is not provided.
No area or factor is considered more important than another. All are reviewed and each case is taken on a case-by-case basis.
The commentary is for educational and commentary purposes only. If you or someone you know feel you are being misclassified so your employer can avoid FLSA requirements or feel there are illegal practices occurring at your work, and would like to be represented by a Nevada attorney, contact our office for a free confidential case review and receive a response within hours. Call Toll Free 866-414-0400.