Self-employed Workers
Employee or Independent Contractor Classification
Employee or Independent Contractor Classification Under the Fair Labor Standards Act (FLSA)
To Whom Does the FLSA Apply?
The FLSA is a federal law that establishes minimum wage, overtime pay, recordkeeping, and child labor standards for employees in the private sector and government at all levels. For example:
- Employers must pay nonexempt employees at least the federal minimum wage for all hours worked.
- Employees are entitled to overtime pay at one-and-a-half times their regular rate for hours exceeding 40 in a workweek.
The FLSA also includes protections such as prohibiting employers from taking employee tips, requiring reasonable break time for nursing employees, and mandating that employers maintain specific records about their workforce. Importantly, these protections do not apply to independent contractors.
Defining Independent Contractors
The FLSA does not explicitly define "independent contractor." However, courts have consistently ruled that the distinction depends on economic reality: is the worker economically dependent on the employer (an employee), or are they in business for themselves (an independent contractor)? Independent contractors include freelancers, self-employed individuals, and others who operate as independent business entities.
Determining Classification Under the FLSA
The classification of a worker as an employee or independent contractor is determined by the economic reality test, which evaluates multiple factors. No single factor is decisive; rather, the relationship's overall circumstances are considered.
The six factors used to analyze the economic realities of a working relationship are:
- Opportunity for Profit or Loss Depending on Managerial Skill
- Investments by the Worker and Employer
- Degree of Permanence of the Work Relationship
- Nature and Degree of Control
- Extent to Which the Work Performed is Integral to the Employer’s Business
- Skill and Initiative
Each factor is assessed to determine if the worker is economically dependent on the employer or independently engaged in their own business.
Example: Opportunity for Profit or Loss Depending on Managerial Skill
This factor examines whether a worker’s ability to profit or incur loss is tied to their managerial skill. Relevant considerations include:
- Setting or negotiating pay rates for services.
- Accepting or declining specific jobs.
- Marketing or advertising to attract more clients.
- Making operational decisions, such as hiring assistants or purchasing equipment.
Example 1: Employee
A worker employed by a quality management consultancy performs ISO audits exclusively for the company’s clients. Assignments are determined by the employer, and the worker does not advertise their services, negotiate contracts, or hire additional help. They may earn more by working additional hours, but their profit is entirely dependent on the company providing assignments. These facts indicate employee status because the worker does not exercise managerial skill that impacts profit or loss.
Example 2: Independent Contractor
A freelance ISO auditor secures their own clients, negotiates contracts, and advertises their services. They decide which clients to work with, set their schedule, and hire subcontractors as needed for larger projects. Their profit or loss is directly tied to their managerial decisions, such as securing more work or managing operational costs. These facts indicate independent contractor status because the worker exercises significant managerial skill affecting their financial success.
By applying these and other factors, the FLSA aims to distinguish between workers who are truly independent and those who rely on an employer economically, ensuring appropriate protections for employees.