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The Economic Realities Test

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The Economic Realities Test

  • Course: Employment Law 101
  • Module: Hiring Process
  • Lesson Type: Video
  • Lesson Duration: 7:22

Lesson Content

We're going to start by thinking about how workers in the workplace are categorized. Are they going to be employee use or are they going to be independent contractors? This is an area that you have to be very careful with when you're dealing with a workforce. How do you designate it? There's a number of reasons. An employee receives benefits. When I say benefits, they receive workers' compensation benefits through the business. They receive unemployment benefits and there may be other benefits depending upon your state your jurisdiction. Also, the employer is obligated to pay a number of state and federal taxes depending on your jurisdiction as well.

Contrast that with an independent contractor. An independent contractor, when they're paid money they have to pay their own taxes out of it. It's not done for them like an employer would. In addition, an independent contractor is responsible for their own workers compensation and unemployment insurance benefits amongst other differences so for these reasons classifying your workforce is important.

Misclassification of a worker as an independent contractor when they should be employees in those benefits being taken from the employer to pay for these various benefits with our government is an area that creates a lot of liability for businesses.

The Fair Labor Standards Act is a federal law enacted in 1938 that deals with how people are paid and in that law is the main area in which we look at the definition of employee from a statutory perspective. An employee must have an employment relationship with the business and to be employed means to, and this is the way it's worded, to suffer or permit to work. Now courts have interpreted that phrase very, very broadly and ultimately, it has to do with whether those workers are economically dependent upon the business so that's what we're looking for when we think about the test that's used by most courts and that is called the economic realities test.

So the economic realities test ultimately looks at a lot of issues. One is how integral is the work that the independent contractor, the worker, does. How integral is that the employer's business. If you owned a restaurant and you hired me to clean the carpets. And I came in once a month to clean the carpets and you paid an invoice and I had my own business. I provided my own chemicals. I came whenever I wanted during the month to make sure at the end of the month they were looking wonderful and you were happy. Then likely the work that I'm doing is not integral to your business because it is just a part of the fixtures which you're in the business for in the way you identify your restaurant is service quality food right and maybe environment to some extent but lesser. Well, if instead you hired me as a cook to go in between eight and five and prep all of these food products in a way that you direct, then likely I am not an independent contractor because of the degree of control and the fact that being a cook is integral to my business. Much more than the idea of some guy that's cleaning carpet. Also, what about managerial skills? If I'm the guy who's cleaning the carpets I could go to other restaurants and clean their carpets or other businesses I can make decisions on what types of chemicals I should use to get the best results and be most cost effective. An employer dealing with an employee generally doesn't give those types of skills to the employee instead, if I'm prepping in the kitchen, you're telling me what foods to prep, how much to prep and how to prep it so it's a much different relationship. Also, if I'm your cook, you have made an investment in my training, in the equipment I use, in the kitchen facilities you give me. But all of that doesn't exist with the guy that's cleaning the carpets for the restaurant so it's a different analysis altogether.

Do the skills and initiatives demonstrate independent judgment? Well, we're not give me your tremendous agree of independent judgment as the employee but we may give you significant independent judgment because all we're managing for independent contractors is the end result, a clean carpet. That's all I want. I don't care how you do it. I'm not going to schedule it as long as it doesn't conflict with my business but I need it cleaned and I need it to look good consistently and if you meet that result then you don't have a problem with the business.

Another aspect of it is permanency. And you look at the carpet cleaner can go clean carpets for several different places but we may not want the guy that we have coming in eight to five working with other restaurants. So those types of decisions are part of the analysis as well. Really the key is the how much control you're exercising over the business.

You know is, is the business dictating training? Is it dictating procedures? Processes? Time? Is it providing specialized equipment in controlling the type of equipment you use and how you use it? And if the answer to those questions are yes then likely you're dealing with an employee as opposed to an independent contractor.

You know there are several instances where a business will create something like a contract, an independent contractor agreement but they don't treat the worker as an independent contractor. They treat them as an employee. The exercise significant control over the process rather than the result and if you have a signed agreement but you're treating them like employees, the fact that you have a signed agreement is not going to carry the day. It's essentially going to be inconsequential. Even if you call them independent contractors, the label in and of itself, isn't part of the analysis. The analysis is, how they're managed, how they're treated, what the resources are. Things of that nature.

Sometimes you'll have a guy who cleans your rug, create a company name and he has incorporated a business. Now, certainly that's important and that can be a factor in the analysis. But in the economic realities test, we're not really looking at that as much as we are from a economic perspective is that worker so entrenched with this business, that he's economically dependent and that's the reality.

Also how are they paid? If you're giving me an invoice and I’m paying you within thirty days, that's a lot different than if I'm paying you every two weeks like the other like the rest of the people that are working that we're calling employees. So all of these factors are important to think about.

Mark Addington


Mark Addington

Mark A. Addington, Esq. advises and advocates on behalf of businesses concerning Labor & Employment Law, Business Regulatory Compliance, Restrictive Covenants (Non-Competition, Non-Solicitation, and Confidentiality), Wage & Hour, Privacy, Technology,...

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