The Fair Labor Standards Act ("FLSA"), which establishes minimum wage, overtime pay, recordkeeping and child labor standards, applies only when there is an employment relationship, that is it applies only to employees, or workers. FLSA defines an "employee" simply as any individual employed by an employer.
The FLSA's minimum wage and overtime requirements don't apply to independent contractors. And so, often, situations arise that make it necessary to resolve a tricky question: is a particular person an employee or an independent contractor for purposes of the FLSA?
The Economic Reality Test
To determine whether an individual is an "employee" under the FLSA, courts look to the economic reality of the parties' business relationship as a whole. The focus here is whether the worker is economically dependent on the business he or she is working for, or, as a matter of economic reality, is he or she in business for himself or herself?
There are several factors that are looked at to determine whether individuals are employees:
- The degree to which the person is independent or is controlled by the employer with respect to the way the work is done
- The individual's opportunities for profit or loss
- The individual's investment in the facilities and equipment of the business
- The permanency and length of the relationship between the business and the individual
- The degree of skill needed to do the person's work, and
- If, and how much, the work performed by the individual is a major part of the employer's business
A finding of an employer-employee relationship is most often based on issues related to control. If the business or person doing the hiring controls or has the right to control the individual's work performance, there is an employment relationship. If there is no or little control over how the work is done, the worker is an independent contractor and not an employee within the meaning of the FLSA.
Nonetheless, there are countless scenarios where an employment relationship can exist, and the courts will normally look at all or some of the above factors in the particular facts of each situation. For example:
- Migrant farm workers were "employees" within the meaning of the Fair Labor Standards Act where: (1) their employer managed all aspects of the farm operation; (2) the workers performed unskilled tasks; (3) the workers contributed no capital to the operation except for their hoes; (4) the workers had no opportunity for profit or loss, and; (5) there was a degree of permanency in the parties' relationship
- Telephone solicitors were "employees" of a newspaper publisher where: (1) the publisher exercised control over them in its hiring techniques, daily sales reports and other reports (2) they had little opportunity for profit or loss; (3) they had no investment in the publisher's facilities; (4) their work required little skill and; (5) the relationship was nearly permanent.
- Prisoners participating in work release programs are usually covered by the FLSA as "employees" of the business or employer that runs the program, but prisoners who work for the prison in which they are incarcerated are not "employees," usually for the reason that employment is not the primary reason for their incarceration
- A worker who fabricated prototype automobile parts at home was an "employee" rather than an "independent contractor" where the company exercised control over the fabrication of parts and procured the work space, materials and most of the tools used by the worker
- Fireworks stand operators were "employees" rather than independent contractors where the owner controlled the size and location of the stand, pricing, merchandising, the hours that the operators were required to attend the stand, and the operators had no significant independent opportunities for profit and loss
As you can see, whether an individual is an employee or an independent contractor depends on many factors and the specific facts of the situation. And, because the FLSA provides significant protections in the form of minimum wage and overtime requirements as well as significant penalties for violations, it is the best interest of all employers and all workers to understand the nature of any work-related relationship.