Correctly classifying your worker as an employee or an independent contractor can be a tough feat especially since there are many different independent contractor tests that exist, and various state-specific guidelines to follow. This article will cover the economic realities test under the Fair Labor Standards Act determining independent contractor status, which can be used as a general self-evaluation tool for your current workforce. For a state-specific determination on your workforce’s classification, contact us for a legal consultation.

The Economic Realities Test – Five Factors under FLSA

The Economic Realities Test is the standard adopted under the Fair Labor Standards Act (FLSA). The focus of the Economic Realities Test is whether the worker is dependent on the company to which they provide services. For each case, the totality of the parties’ relationship needs to be evaluated, and below are five useful factors for consideration:

1. The degree of control the company has over the worker performing the service. Variables that go into determining how much control a company retains over the worker are:

1. 1. who sets the pay rate;
   2. who controls the hiring and firing of workers to assist with the project;
   3. who delegates tasks;
   4. who has responsibility for licenses, taxes, and other administrative obligations;
   5. who advertises;
   6. who prepares the work schedules; and/or
   7. if the work is completed with or without close supervision or frequent status reports.

The more of the above factors are controlled by the worker, the more likely such worker is an independent contractor.

2. The relative investment in facilities. Variables that go into determining the amount of investment a worker has made include whether the worker is reimbursed for any purchases or materials or whether the worker uses their own tools or equipment. The more investment or tools are contributed by the worker, the more likely such worker is an independent contractor.

3. The worker’s opportunity for profit and loss. Variables that go into determining how much opportunity the worker has are:

1. whether the worker has made any investments,
2. whether the worker can earn a profit by performing the job more efficiently or exercising managerial skill, and/or
3. whether the worker can suffer a loss of capital investment

The more control a worker has over profit, loss, and investments, the more likely such worker is an independent contractor.

4. The permanency of the parties’ relationship. If the parties’ relationship is continuous, the worker is likely to be an employee. If the parties’ relationship has a definitive start and end date, the worker is likely to be an independent contractor. This is usually established under an independent contractor service agreement.

5. The skill required. The more skilled that is required for a task, the more likely that the worker is an independent contractor.

Although the tests for independent contractor status often share common characteristics, each test is unique and requires the skills of an attorney to interpret. If you are an employer who needs guidance or has questions on determining whether your worker is an independent contractor or employee, contact us for a complimentary consultation.