Am I an employee?

Employees Only sign at a work place, used here to illustrate employee law subjects such as whether an individual is an employee versus a contractor.

Note: Although some information in this post is still valid, this area of the law is changing. For example, see “Am I an Employee (Revisited)” for an update.

Many startups aim to be part of the new gig economy. They are going to be “the Uber of…” However, people working in the gig economy often ask, “Am I an employee?”

The Gig Economy

The Bureau of Labor Statistics says there is no official definition of the gig economy. They describe a gig as “a single project or task for which a worker is hired, often through a digital marketplace, to work on demand.”

A Fast Company Article, “The Gig Economy Won’t Last Because It’s Being Sued To Death,” defines a gig economy company as, “…a market place with two sides. On one side there are people who need a job done—a ride to the airport, a clean house, a lunchtime delivery. On the other are people who are willing to do that job.”

The size of the gig economy is estimated in the Sept. 2016 Financial Times article, “When Your Boss is An Algorithm.” Here the author says, “There are no good estimates on the global scale of the gig economy but in the U.S. there are about 800,000 people earning money this way.” That is, 800,000 people work thought an intermediary or digital marketplace to find work.

Employee or Independent Contractor?

Startups have a tendency to classify employees as independent contractors because it seems less complicated and cheaper. Employee classification matters because misclassification leads to violations of labor and tax laws.

Even before the gig economy employer’s struggled with the question of whether a person is an employee or an independent contractor. For example, in 2007, the Government Accountability Office (GAO) estimated that  at least 150,000 workers were misclassified as independent contractors.

Courts chose between several tests to determine whether a person is an employee or an independent contractor, including the “Right to Control,” “Economic Reality,” and the “IRS Test.” A Washington Court of Appeals case, Anfinson v. FedEx Ground, contrasts the “Right to Control” and the “Economics Reality” tests.

The “Right to Control” Test

Under this test, a court determines whether a person is an employee or an independent contractor using the following factors:

  1. The degree that the employer has the right to control the manner in which the work is to be performed;
  2. The person’s opportunity for profit or loss depending upon their managerial skill;
  3. The person’s investment in equipment or materials required for their tasks, or their employment of others;
  4. Whether the service rendered requires a special skill;
  5. The degree of permanence of the working relationship;
  6. Whether the service rendered is an integral part of the employer’s business;
  7. The method of payment, whether by the time or by the job; and
  8. Whether or not the person and the employer believed they created either an employment relationship or an independent contractor relationship.

The “Economics Reality” Test

Under this test, a court determines whether a person is an employee or an independent contractor using the following factors:

  1. The degree of the alleged employer’s control over the worker;
  2. The worker’s opportunity for profit or loss;
  3. The extent of the worker’s investment in equipment or materials;
  4. The degree of skill the work entails;
  5. The permanence of the working relationship between the parties;
  6. Whether the service rendered by the worker is an integral part of the employer’s business.

The IRS Test

The IRS Test is encapsulated in Form SS-8, “Determination of Employee Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” This form uses approximately twenty-factors divided into three categories: Behavioral Control (work assignments and training); Financial Control (payments, tools, and expenses); and Relationship with the Firm (vacation, sick leave, competitive restrictions).

Which Test to Use?

As listed here, the tests have been arranged to point-out there are overlapping factors. For all of the tests no single factor controls, but rather courts look at the totality of the factors applied to the facts of the case before them.

For example, in Anfinson v. FedEx Ground, the Washington Court of Appeals determined the legal standard for whether FedEx Ground Package System drivers were employees or independent contractors under the Washington Minimum Wage Act (MWA) was the “economic realities” test. In part their reasoning was the Washington MWA is based on the Fair Labor Standards Act (FLSA), and the “economic realities” test is the favored test for FLSA matters.

Independent Workers

The most recent cases on the matter of employee classification seem to involve FedEx in various jurisdictions across the U.S. There is also recent litigation regarding Uber drivers. These recent cases ignore the idea that two classifications are insufficient. The new gig economy may require a new set of employment categories. For example, the Hamilton Project at Brookings Institution has published a proposal for modernizing labor laws with a new classification of “Independent Worker.” Such independent workers would work through intermediaries who match workers with customers.

While it may take some time for courts to recognize any new classification, in the meantime, startups should not just guess or assume workers are contractors merely because it is less expensive or easy to do at the time.

Disclaimer: This brief touches on issues of interest to startups, because the brief is about evolving technology, emerging business models, or the law. However, the content in this brief is offered as information only. Nothing in the content of this brief is offered as legal advice. No one should act or refrain from acting, based on the content of this brief without seeking specific legal advice about their particular situation and circumstances.

Leave a Reply

Your email address will not be published. Required fields are marked *