Employee or Independent Contractor?
Workers and businesses often confuse the status of “employee” with that of “independent contractor." It's a fine distinction, but getting it wrong can have severe consequences. Workers can lose money and legal rights, and businesses can face considerable liability from employees or the government.
Labels Aren't ConclusiveImportantly, merely labeling a worker "independent contractor" in employment documents or pay stubs is not conclusive - courts tend to look at the economic reality, not labels. The law generally determines whether a worker is an employee or a contractor by asking whether the worker is "economically dependent" on the business. Courts considering whether a person is an employee or contractor will ask whether, as a matter of economic reality, the worker is economically dependent upon the alleged employer or is instead in business for themselves.
What Does "Economic Dependence" Mean?Courts have used several factors to help decide whether a worker is "economically dependent" on the business. First, how closely does the business control the manner in which the employee performs work? It may be significant if the worker has so much control over a meaningful part of the business that they are a separate economic entity from the business. Second, does the worker have the opportunity for profit or loss depending on their managerial skill? Workers who stand to gain or lose money based on their personal skills might be more likely to be economically independent from the business they work for. Third, does the worker buy their own equipment to perform their job, or hire their own assistants? Buying equipment and hiring help might show the worker is in business for themselves. Fourth, does the worker's service require special skills? Unskilled workers might have greater economic dependence on the business they work for. Fifth, how permanent is the working relationship? And finally, is the worker's service an integral part of the business? Courts use these factors as a guide only, so no one factor can completely decide the issue.
Why Does It Matter to Workers?Being classified as an independent contractor rather than an employee can mean lower take home pay, reduced benefits and fewer legal protections. For instance, laws like the federal Fair Labor Standards Act and Washington Minimum Wage Act protect employees' right to be paid fairly and to be paid at a higher rate for overtime. These laws don't protect independent contractors. Similarly, the federal Civil Rights Act prohibits employers from discriminating against employees based on characteristics like race or gender. Independent contractors lack these protections. Employees often have access to employer-sponsored benefit plans protected by the federal Employee Retirement Income Security Act. Independent contractors can't use these benefits. And, unlike employees, independent contractors pay an extra share of federal payroll taxes.
Why Does It Matter to Businesses?Businesses who incorrectly treat their workers as independent contractors face significant liability. This might include IRS enforcement actions demanding the employer pay the employee's share of federal payroll taxes. It commonly includes class action lawsuits filed on behalf of workers alleging the employer owes them overtime pay, access to employee benefit plans, or other items available to employees but denied to independent contractors.