Compliance: Making sense of the myriad tests for independent contractor v. employment status

There are multiple tests depending upon which area of law is implicated

The question of whether a worker is an employee or an independent contractor can have very important consequences, as the two categories receive very different treatment under the law. To name only a few differences, there are no federal or state income tax withholding obligations for independent contractors; wage and hour laws do not apply to independent contractors; most anti-discrimination laws do not apply to independent contractors. And, of course, the employer mandate under the Affordable Care Act does not apply in the case of independent contractors. There is a lot riding on the question.

It can sometimes be difficult to predict whether a worker will be deemed an employee or an independent contractor, but there are multiple tests depending upon which area of law is implicated.

For example, where a worker is claiming to be an employee and is seeking remedies under California law (for example, state wage and hour or state discrimination claims), the primary test of employment relationship is whether the principal has the right to control not just the means, but also the manner in which the results are achieved. Added to this are a series of “secondary factors,” such as whether the worker is engaged in a distinct occupation, whether the worker supplies the tools and instrumentalities for the job, the method of payment, whether the worker has a substantial investment in the business, whether the worker hires employees to assist him, whether the parties believe they are creating an employer-employee relationship, and the degree of permanence of the relationship. 

Now, say a worker sues under Federal law. Is there a different test? Yes there is. Indeed, the test is different depending upon the Federal regime under which you are suing. For example, if you are suing under the Fair Labor Standards Act for wage and hour violations, in that case the “economic realities test” is applied, which revolves around five factors. But now say that you’re suing for benefits under the federal Employee Retirement Income Security Act. Yet another test applies, this one called the “agency test,” which revolves around thirteen factors.

And some tests use more than thirteen factors. Say the IRS gets curious about whether a business has been properly withholding income taxes on its employees. Does the IRS use the same standard to determine employment status as any of those above? No. The IRS uses a 20-factor test to determine employment status. And to make things more confusing still, in some circumstances, the IRS disregards its 20-factor test and uses instead a three-factor test.

The multiplicity of tests does not end there. For actions brought under Title VII of the Civil Rights Act, yet another set of factors (this time, twelve of them) apply. And for scrutiny under the Affordable Care Act, Age Discrimination in Employment Act, National Labor Relations Act, Family and Medical Leave Act, and Americans With Disabilities Act, one or other of the tests describe above applies.

This bewildering multiplicity of tests has one effect that legislators, agencies, and plaintiff attorneys all like. It makes it easiest to simply designate all workers employees. No one will ever penalize a business for designating a worker an employee. By contrast, the penalties for misclassifying an employee as an independent contractor are severe.

But, on the other hand, classifying workers as employees can be extremely expensive, and thus if workers should properly be classified as independent contractors, it makes sense to designate them as such.

So how can one navigate the complex labyrinth of tests? Is there a single idea that runs through all of them? The answer, fortunately is yes.

In a word, an employee is a duck.

That is, if it looks, quacks, walks, flies, swims like one, it is one. There may be a dizzying array of tests, but all are focused on the same goal. All are meant to focus the mind on the relevant factors that would allow someone to determine whether the worker “feels” like an employee.

Does this make it easy to determine an employee from an independent contractor? No. But at very least, it minimizes the risk of the most nightmarish possibility of all – i.e., that a person may be an employee under one regime and an independent contractor under another. The details of the factor tests may differ from test to test, but all are essentially trying to reach the same goal, and in the same way. For this reason, in most cases, they should also reach the same result.

Contributing Author

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Michael A.S. Newman

Michael Newman is a partner in the Los Angeles office of Barger & Wolen LLP. He is handles a broad range of litigation matters including...

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