In recent years, many companies have misclassified their workers as “independent contractors” rather than employees. Instead of treating these workers as W-2 employees, they pay their workers on a 1099 basis: that is, without deducting an employee’s income taxes, paying employer payroll taxes like Medicare, Social Security, Unemployment or Worker’s Compensation Insurance, or complying with wage and hour laws like the FLSA. Employers often use the independent contractor model to save costs, even when doing so may well be illegal. This is especially so in today’s “Gig Economy.” But just because a company makes its worker sign an “independent contractor” agreement stating that the worker "agrees" they are not an employee and not entitled to benefits or overtime pay, it is many times not actually the case that the worker is truly an independent contractor in the eyes of the law. Whether a worker is an employee (and thus entitled to workplace protections such as minimum wage and overtime) is determined by various multi-factored legal tests, depending whether the FLSA or a parallel state law is being asserted.
For example, under the FLSA, the worker is an employee if as a matter of “economic reality,” the worker is dependent on the employer for income. To measure this, Courts look to factors such as:
- the degree of the alleged employer's right to control the manner in which the work is to be performed;
- the alleged employee's opportunity for profit or loss depending upon his managerial skill;
- the alleged employee's investment in equipment or materials required for his task, or his employment of helpers;
- whether the service rendered requires a special skill;
- the degree of permanence of the working relationship;
- whether the service rendered is an integral part of the alleged employer's business.
Under some states’ wage and hour laws, such as in New Jersey, a worker is presumed to be an employee unless the employer can demonstrate all three of the following: (this is called the “ABC Test”):
- The individual has been and will continue to be free from control or direction over the performance of work performed, both under contract of service and in fact; and
- The work is either outside the usual course of the business for which such service is performed, or the work is performed outside of all the places of business of the enterprise for which such service is performed; and
- The individual is customarily engaged in an independently established trade, occupation, profession or business.
The economic reality test is a wholistic test in which no one factor is determinative (i.e., a worker may still be an employee even if not under the employer's control if the other factors lean towards employee status). Unfortunately, it also means the question of whether one is an employee can only be answered deep into litigation.
Conversely, if a putative employer-defendant fails to satisfy any prong of the ABC test, then the plaintiff will be found to be an employee. The ABC test is therefore much more predictable. For example, a worker who engaged in work in the same line of business as his or her employer (e.g., a carpenter working for a construction company, a computer programmer working for a software company, or a nurse working for a homecare company) is very likely to be found to be an employee under the ABC test, even if they are not working under the control of their employer. The ABC test is an important counterweight to the rampant independent contractor misclassification that is occurring in today's Gig Economy. The ABC test currently exists under California, New Jersey and Massachusetts law and it is likely we will see more states adopt some version of the ABC test in the coming years.