The Economic Realities Test seeks to determine whether, as a matter of economic reality, the worker is reliant on the hiring party, or is in business for him/herself.
[UPDATED 1/6/2021: See Note in red, below.]
The Fair Labor Standards Act (FLSA) uses an Economic Realities Test to determine whether a worker is a contractor or an employee. If the worker is an employee under this test, then the federal minimum wage and overtime rules apply, subject to any exemptions. This test is also used to determine who is an employee under the Family and Medical Leave Act (FMLA).
The reason the FLSA test is different from the Right to Control tests used under ERISA and the federal anti-discrimination statutes is because the definition of “employee” is different.
The FLSA defines “employ” broadly, as meaning “to suffer or permit to work.” 29 U.S.C. 203(g). This definition is more expansive than the common law definition of “employee,” and it encompasses a broader set of relationships than the common law agency tests (i.e., the Right to Control tests).
The Economic Realities Test seeks to determine whether, as a matter of economic reality, the worker is reliant on the hiring party to earn a living (employee) or is self-reliant and independent (contractor).
This is a multi-factor balancing test, but the factors and emphasis are different from those in the Right to Control Tests.
The factors in the Economic Realities Test are most commonly understood to include the following:
Is the Work an Integral Part of the Employer’s Business?
- If yes, the worker is likely an employee. If the work is tangential to the business, such as a landscaper performing services for an accounting firm, then the worker is more likely a contractor.
Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
- If yes, the worker is more likely a contractor. Contractors manage their own businesses. Strong managerial skills are more likely to result in a profit; poor managerial skills are likely to result in a loss. Employees, on the other hand, make money either way.
How Does the Worker’s Relative Investment Compare to the Employer’s Investment?
- More investment by the worker means the worker is more likely in business for himself/herself and is therefore more likely an independent contractor.
Does the Work Performed Require Special Skill and Initiative?
- Independent contractors tend to be trained and have a specialized skill. Unskilled workers, or those who need more training, are more likely employees.
Is the Relationship between the Worker and the Employer Permanent or Indefinite?
- Indefinite, ongoing relationships resemble employment. Fixed project-based relationships are more typical of independent contractors.
What is the Nature and Degree of the Employer’s Control?
- The Right to Control Test factors can be considered as a small part of the analysis, but they are secondary to the economic factors described above.
Federal courts tend to articulate the Economic Realities Test using the same or similar factors, but the precise language and factors sometimes differ from jurisdiction to jurisdiction.
The DOL has also advised that some of the important factors in the Right to Control Test are not relevant to the Economic Realities analysis. For example, in DOL Fact Sheet #13: Am I an Employee: Employment Relationship under the Fair Labor Standards Act, the Labor Department writes, “the fact that the worker has signed an agreement stating that he or she is an independent contractor is not controlling because the reality of the working relationship – and not the label given to the relationship in an agreement – is determinative.” The point here is that parties cannot contractually agree to ignore the FLSA. If the relationship is employment, the parties cannot agree to disregard the minimum wage and overtime laws.
Other factors that the DOL considers irrelevant are whether the worker’s business is incorporated, whether the worker is licensed by a state or local agency, and how and when the worker is paid. (Courts, however, have been known to be persuaded by these supposedly irrelevant factors, so the DOL guidance is certainly not determinative.)
UPDATE 1/6/2021: The Department of Labor has released a new regulation that will slightly restate these factors. It is scheduled to take effect on 3/8/2021. The revised test has not been adopted by the courts and is not intended to change the test, but only to refocus the points of emphasis when making the independent contractor vs. employee determination. Read more here and here.
Key Takeaway: The key question in the Economic Realities Test is whether the worker is economically dependent on the company or is in business for him or herself. If the worker is economically dependent upon the company, the worker is likely an employee. If the worker has his or her own business and is economically independent of the company, the individual is likely an independent contractor. Ultimately, the factors listed above are just tools for helping to make that determination.
© 2017, 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.