… or Employee?
I have many clients who think that if someone markets himself/herself as an “independent contractor” – then they’re an independent contractor. If it were that easy, I’d self-identify as Wonder Woman and call it good. Unfortunately for employers (and for me, not-Wonder-Woman), what makes an independent contractor an actual independent contractor (“IC”) is much more complicated. It is critical to know the law in this area, because a mistake could cost you dearly. But the law can be complicated, and it is always changing. In fact, the National Labor Relations Board (“NLRB”) clarified its standard a few days ago when it returned to the previous “common law test” for ICs. And based on the outcome of the 2020 elections, the standard may change again. What is an employer to do? Arm yourself with knowledge, first.
Generally, employment protections are for employees only. So, employment laws that oversee protections like overtime wage, minimum wage and leave laws do not apply to ICs – which can be an often attractive reality for employers. If you pay ICs, read through these lists.
As an employer in Oregon, it matters what the NLRB says on the subject of ICs, but it also matters what the Wage and Hour Division of the Bureau of Labor and Industry (“BOLI”) says on the subject. Oh, and it also matters what BOLI says on the subject. That’s right, we are talking about numerous different tests that different agencies (and divisions within the same agency) use to determine whether there is an employment relationship or not.
The Wage and Hour Division of BOLI, responsible for enforcement of laws that cover minimum wage, overtime wage, working conditions, child labor, wage collection, etc. uses what is called the “economic realities” test to establish whether there is an employment relationship between the individual and the employer. The economic realities test looks at six factors to determine whether a worker is economically dependent on a business:
- How much control does the business exercise over the worker?
- How much of an investment is there between the worker and the business?
- How much of the individual’s profit and loss is determined by the business?
- How much skill and initiative is required to perform the job?
- How permanent is the relationship between worker and business?
- Is the work performed by the individual an integral part of the business?
BOLI itself, responsible for enforcement of civil rights laws, uses a different test, called the “right to control” test. This test looks at:
- Does the individual have the right to control his/her work?
- How is the individual paid? Does he/she set their rate?
- Does the business furnish equipment, or does the individual?
- Does the business have the right to fire the individual?
As if there are not enough tests to keep in mind, the NLRB has jurisdiction over employees for purposes of unionization and protected concerted activity, and for many years determined employment status by applying the common law test:
- How much control the master exercises over the details of the work?
- Is the worker engaged in a distinct occupation or business?
- Is the worker engaged in the kind of work that is typically and traditionally done under the direction of an employer?
- How much skill is required in this particular line of work?
- Who supplies the equipment, tools, and place of work?
- How long has the individual been working for the business?
- How is the individual paid? By hour? By job?
- Is the work done a regular part of the business?
- What do the parties think about the arrangement? Does the worker believe he/she is an employee?
- Is the individual in business?
In a recent decision on January 25, 2019, the NLRB overruled a 2014 Obama-administration revision of this common law test that had added the ‘superfactor’ of entrepreneurial opportunity to its common law analysis. In its opinion, the NLRB indicated that entrepreneurial opportunity, along with employer control, are critical factors in the analysis and determination of employment relationship. Back to the common law test we go.
A couple other things to keep in mind as you review your engagement agreements with ICs. These tests are qualitative in nature, meaning that a decision-maker weighs the strength and weakness of answers to all of the questions and arrives at a conclusion rather than adding up columns and arriving at a conclusion. Also, remember that other state agencies base their determinations on different tests entirely. Take ORS 670.600 for example: that statute sets out what an IC is for the Department of Revenue, Employment Department, Construction Contractors Board and the Landscape Contractors Board. And of course, there is always the blissful experience of the IRS website, which lays out its classification criteria at: https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee.
Improper classification of an employee as an IC may result in assessed back taxes, and sometimes even penalties and interest associated with the misclassification. Furthermore, employees often seek back wages and civil penalties through the adjudicative or civil court process if they were not properly paid under relevant employment laws. As an employer, your ability to maneuver the trending gig economy, as well as properly handle the new type of millennial worker, will play a determinative role in your success and help prevent litigious assault on your bottom line. Knowing how to work within the system is a critical piece in that maneuvering. Drop me a line if you have any questions.