Professional Documents
Culture Documents
I
Charles J. Muhl n the American workplace today, a full-time, tions, the answer dependsin this case, on the
40-hour-a-week employee who stays with the Federal law at issue. In general, though, courts
same employer performing the same job over evaluate the totality of the circumstances sur-
the course of an entire worklife would be viewed rounding a workers employment, with a focus on
as a rarity, or at least as a person found in lesser who has the rightthe employer or the em-
proportion in the U.S. workforce than in decades ployeeto control the work process.
past. Todays workplace includes a variety of The question Is a worker an employee? may
workers in contingent arrangementsindepend- seem like a simple one to answer on its surface.
ent contractors, leased employees, temporary em- The dictionary definition of employee says
ployees, on-call workers, and moreperceived succinctly that an employee is a person who
to be a result of employers desire to reduce labor works for another in return for financial or other
costs and employees desire to increase their flex- compensation.3 Under that definition, independ-
ibility, among other things. The Bureau of Labor ent contractors would appear to be employees.
Statistics recently reported that in February 2001 However, the legal definition of employee is
the contingent workforce, or those workers who concerned with more than the pay received by a
do not have an implicit or explicit contract for worker for services provided. Blacks Law Dic-
ongoing employment and who do not expect their tionary defines employee as a person in the
current job to last, totaled 5.4 million people, service of another under any contract of hire,
roughly 4 percent of the U.S. workforce.1 Accord- express or implied, oral or written, where the em-
ing to the BLS survey, millions more were em- ployer has the power or right to control and di-
ployed in alternative work arrangements:2 8.6 mil- rect the employee in the material details of how
lion independent contractors (representing 6.4 the work is to be performed.4 In contrast, an
percent of total employment), 2.1 million on-call independent contractor is one who, in the ex-
workers, 1.2 million temporary help agency work- ercise of an independent employment, contracts
ers, and 633,000 contract company workers. The to do a piece of work according to his own meth-
Bureau treats these contingent workers and ods and is subject to his employers control only
workers in alternative work arrangements as part as to the end product or final result of his work.5
of total U.S. employment, and although they are This legal distinction as to how a worker must be
in a typical employment situation, most of the classified has broad implicationsand poten-
general public would probably consider them tially negative consequences for mischaracter-
Charles J. Muhl is an employees. izationfor both employers and workers alike.
attorney in the firm of
Goldberg, Kohn, Bell,
But how does Federal law treat workers in con- This article examines how the legal determina-
Black, Rosenbloom & tingent and alternative work arrangements? That tion is made that a worker is either an employee or
Moritz, Ltd., Chicago, is, are such workers viewed as employees who an independent contractor, beginning with a dis-
Illinois. E-mail:
charles.muhl@
are entitled to legal protections under Federal leg- cussion of why the determination is important
goldbergkohn.com islation? As is frequently the case with legal ques- and then discussing the tests used by courts to
make the determination and the laws pursuant to which each behalf,18 and the workers themselves can seek compensation
test applies. for job benefits that the employer denied them on the basis of
their supposed status as independent contractors.
Employee or independent contractor? One of the most striking examples of the danger of
mischaracterizing workers as independent contractors rather
Employers have used independent contractors and other con- than employees occurred in Vizcaino v. Microsoft,19 a case in
tingent workers more frequently in recent times for a variety which the U.S. Court of Appeals for the Ninth Circuit held that
of reasons, including reducing the costs associated with sala- a class of workers for the leading U.S. computer software com-
ries, benefits, and employment taxes and increasing the flex- pany were employees who were entitled to participate in
ibility of the workforce.6 Under U.S. law, employers are re- Microsofts various pension and welfare plans, despite the
quired to pay the employers share, and withhold the workers fact that the workers had signed an agreement that labeled
share, of employment taxes for employees, but not for inde- them as independent contractors.
pendent contractors. Employment taxes include those col- Prior to 1990, Microsoft hired freelancers to perform vari-
lected pursuant to the Federal Insurance Contributions Act ous services for the company over a continuous period, in
(FICA)7 for the U.S. Social Security system; those collected some cases extending in excess of 2 years. Upon joining
pursuant to the Federal Unemployment Tax Act (FUTA),8 Microsoft, the former freelancers executed agreements which
which pays unemployment benefits to displaced workers; and specifically stated that they were independent contractors
income tax withholding.9 and not employees and that nothing contained in the agree-
U.S. law imposes other obligations on employers with re- ment would be construed to create an employer-employee
spect to employees that are not imposed on independent con- relationship. Despite the agreements, the workers were fully
tractors.10 The Fair Labor Standards Act (FLSA)11 requires integrated into Microsofts workforce, working under nearly
employers to meet minimum-wage and overtime obligations identical circumstances as Microsofts regular employees.
toward their employees. Title VII of the Civil Rights Act of The erstwhile freelancers worked the same core hours at the
196412 prohibits employers from discriminating against their same location and shared the same supervisors as regular
employees on the basis of race, color, religion, sex, or national employees. The only distinction between the freelancers and
origin, while the Age Discrimination in Employment Act regular employees was that the freelancers were hired for spe-
(ADEA)13 prohibits employers from discriminating against em- cific projects. Microsoft neither paid the employers share,
ployees on the basis of their age. The Employment Retirement nor withheld the workers share, of FICA taxes and did not
Security Act (ERISA)14 sets the parameters of qualified em- allow the workers to participate in the companys pension
ployee benefit plans, including the level of benefits and plans, on the basis of the agreements the workers had signed
amount of service required for vesting of those benefits, typi- stating that they were independent contractors.
cally in the context of retirement. The Americans with Disabili- The IRS investigated Microsoft and determined that the
ties Act (ADA)15 prohibits employers from discriminating workers were employees, not independent contractors, and
against qualified individuals who have disabilities. The Fam- that Microsoft should have been withholding taxes for them.20
ily and Medical Leave Act (FMLA)16 requires employers to Accepting the IRS determination, Microsoft conferred em-
provide eligible employees with up to 12 weeks of unpaid ployee status on certain of the workers, but dismissed others
leave per year when those employees are faced with certain from employment. Those who were dismissed then filed a
critical life situations. The National Labor Relations Act class-action suit seeking to have the court declare that they
(NLRA)17 grants employees the right to organize and governs were eligible to participate in Microsofts pension plans. The
labor-management relations. district court determined that the workers were employees,
Clearly, then, some incentive exists for employers to clas- not independent contractors.21 On appeal, Microsoft con-
sify their workers as independent contractors rather than em- ceded that the workers were employees, but argued (1) that
ployees, in order to reduce costs and various legal obliga- they had waived their right to participate in the companys
tions. However, the failure of an employer to make the proper pension plans by executing the agreements which specifi-
determination as to whether workers are employees or inde- cally stated that they were independent contractors and not
pendent contractors can have dire consequences. Employers employees and (2) that nothing contained in the agreement
who are careless in their labeling of workers as independent could be construed to create an employer-employee relation-
contractors risk exposure to substantial liability in the future ship. The court of appeals rejected Microsofts argument,
under Federal law if the workers are mischaracterized. The finding that the companys pension plan administrator had
U.S. Governmentin particular, the Internal Revenue Service acted arbitrarily and capriciously in denying the workers claim
(IRS)can seek to recover back taxes and other contributions that they were entitled to participate in the pension plans. The
that should have been paid by the employer on the employees court found that the administrator should have focused on
Test Description Laws under which test has been applied by courts
Common-law test (used by Employment relationship exists Federal Insurance Contributions Act
Internal Revenue Service (IRS)) if employer has right to control
work process, as determined by Federal Unemployment Tax Act
evaluating totality of the
circumstances and specific Income tax withholding
factors
Employment Retirement and Income Security Act
National Labor Relations Act
Immigration Reform and Control Act (IRS test)
Economic realities test Employment relationship exists Fair Labor Standards Act
if individual is economically
dependent on a business for Title VII
continued employment
Age Discrimination in Employment Act
Americans with Disabilities Act
Family and Medical Leave Act (likely to apply)
compensation beginning in 1938, the kind of work that Walker taxes. The appeals court sustained Polks conviction, finding
did for Williamson did not change at all. Walker still performed that the jury had properly considered, under the common-law
work as an attorney at the direction of Williamson. That right test, the totality of the circumstances of the working relation-
to control was dispositive for the court. ship between Polk and his workers and also had properly
Similarly, in United States v. Polk,27 the U.S. Court of Ap- focused on Polks right to control the workers, both with re-
peals for the Ninth Circuit found that an employer could be spect to the product of the work and the means by which the
convicted of a criminal offense for failure to pay FICA employ- product was produced.
ment taxes, despite the employers declaration that its work- To summarize, then, under the common-law test, an em-
ers were all subcontractors. Polk was notified by an IRS agent ployee is a worker whose work process and work product are
that he was required to establish a separate bank account to controlled by the employer. In determining who has the right
be used to deposit employees tax withholdings. Prior to re- to control in a particular case, courts look to such factors as
ceiving this notice, Polk paid his workers on an hourly or supervision, skill level, method of payment, whether the rela-
weekly basis, had them work fixed hours, supervised the work- tionship is ongoing, who supplies the tools and materials for
ers, and supplied them with the tools and materials necessary the work, whether the relationship between the worker and
to perform their work. Furthermore, with the exception of one the employer is exclusive, and the parties intent, as well as
individual, all of the workers worked exclusively for Polk. other, related factors.
These conditions did not change after the IRS served Polk
with notice that his workers were employees, but thereafter, Economic realities test. The economic realities test, which
Polk represented to the IRS that he no longer had employees is most significantly applied in the context of the Fair Labor
and employed only subcontractors. Polk was convicted of a Standards Act28 governing minimum-wage and overtime obli-
criminal offense for failure to withhold wages to pay FICA gations, focuses on the economic relationship between the
Exhibit 2. Factors used to determine a workers status under the common-law test
Right to control Employer controls details of the work Worker controls details of the work
Type of business Worker is not engaged in business or Worker operates in business that is distinct from
occupation distinct from employers employers business
Supervision Employer supervises worker Work is done without supervision
Skill level Skill level need not be high or unique Skill level is specialized, is unique, or requires substantial
training
Tools and materials Employer provides Worker provides instrumentalities and tools of
instrumentalities, tools, and workplace and works at a site other than the
location of workplace employers
Continuing relationship Worker is employed for extended, Worker is employed for specific project or for limited time
continuous period
Method of payment Worker is paid by the hour, or other Worker is paid by the project
computation based on time worked
is used to determine pay
Integration Work is part of employers regular Work is not part of employers regular business
business
Intent Employer and worker intend to create Employer and worker do not intend to create an employer-
an employer-employee relationship employee relationship
Employment by more Worker provides services only to Worker provides services to more than one business
than one firm one employer
Exhibit 3. Factors used to determine a workers status under the economic realities
test
Factor Worker is an employee if Worker is an independent contractor if
Integration Worker provides services that are a Worker provides services outside the regular business
part of the employers regular business of the employer
Investment in facilities Worker has no investment in the work Worker has a substantial investment in the work
facilities and equipment facilities and equipment
Right to control Management retains a certain type and Management has no right to control the work process of
degree of control over the work the worker
Risk Worker does not have the opportunity Worker has the opportunity to make a profit or incur a
to make a profit or incur a loss loss from the job
Skill Work does not require any special or Work requires a special skill, judgment, or initiative
unique skills or judgment
Continuing relationship Worker has a permanent or extended Work relationship is for one project or a limited duration
relationship with the business
DialAmerica also employed workers as distributors, per- and, therefore, were employees under the economic realities
sons who gave the cards with names to the home researchers. test.
The Department of Labor sued DialAmerica for paying the In contrast, the appellate court held that the distributors of
home researchers and distributors less than the minimum the research work were independent contractors under the
wage for the work they did, arguing that they were employees Fair Labor Standards Act. The court found that DialAmerica
under the Fair Labor Standards Act. exhibited minimal control over the distributors work provid-
The court of appeals ruled that, under the economic re- ing cards to the home researchers, because the distributors
alities test, the home researchers were employees. First, the maintained records of the work and were permitted to recruit
court found that the workers did not make a great investment home researchers. The court also noted that the distributors
in their work, they had little opportunity for profit or loss, and risked financial loss if they did not manage the distribution
the work required little skill. Second, the court ruled that network properly, because their transportation expenses could
DialAmericas lack of control over the manner in which the exceed their revenue. The transportation expenses also re-
home researchers did their work did not support a finding quired the distributors to make an investment in the business,
that they were independent contractors, because the very the court found. Finally, the distributors required somewhat
nature of home work dictated that the times worked would specialized managerial skills in operating the distribution net-
be determined by the workers and they would be subjected work, according to the court. Although the distributors were
to very little supervision when working. The fact that a per- typically employed for a long period, the Court found that
son works from home does not, on its own, determine whether factor insufficient to overcome the weight of the remaining
the person is an employee under the Fair Labor Standards circumstances indicating that the distributors were independ-
Act, the court said. Third, the court found that the home ent contractors.
researchers had a continuous working relationship with In Brock v. Superior Care, Inc.,31 the U.S. Court of Ap-
DialAmerica under which they did not work for other em- peals for the Second Circuit found that an employer had vio-
ployers. Finally, the court held that the home researchers lated the Fair Labor Standard Acts overtime-pay protections
were an integral part of DialAmericas business because they by not paying overtime to nurses who were employees under
did the very worklocating phone numbersthat was es- the Act. Superior Care referred nurses for temporary assign-
sential to DialAmericas ability to renew subscriptions, de- ments to hospitals, nursing homes, and individual patients.
spite the fact that they located only approximately 4 per- The company would assign nurses as work opportunities
cent to 5 percent of the number of phone numbers the became available, and the nurses were free to refuse an as-
company sought to be retrieved. After analyzing these fac- signment for any reason. If a nurse accepted an assignment,
tors, the court ruled that the home researchers were economi- the nurse reported directly to the patient, and Superior Care
cally dependent on DialAmerica for continued employment provided minimal supervision through visits to job sites ap-
tion for a prior charge of discrimination against the hospital. The supplied the tools and materials to make it possible for Diggs to
court found that, although she was appointed to the hospitals provide medical care and imposed standards of care upon those
provisional medical staff and enjoyed the privileges associated with privileges, the hospital did not, in fact, direct the manner or
with that appointment, including the ability to treat patients means by which medical care was to be provided by the physi-
through hospital facilities, Diggs was an independent contrac- cian. Diggs treated patients without direct supervision and
tor, not an employee, of the hospital under the hybrid test. merely required the presence of a sponsor during surgical pro-
Noting first that the hybrid test takes into account both the cedures to attest to the physicians qualifications. Furthermore,
economic realities of the working relationship and the extent to the hospital did not pay a salary to Diggs, nor did it pay her
which the employer is able to control the details and means of licensing fees, professional dues, insurance premiums, taxes, or
the work being done, the court then specified additional factors retirement benefits. These considerations cemented the courts
to be considered under the test. Certain of those factors, includ- conclusion that Diggs was an independent contractor who was
ing supervision, skill level, method of payment, who supplies not protected by Title VII.
the tools and materials, the duration of the employment relation- The hybrid test seeks to combine the general and specific
ship, the extent to which the work is integrated into the factors of both the common-law test and the economic reali-
employers business, and the intention of the parties, are con- ties test, recognizing that, in each legal determination of
sidered under both the common-law test and the economic reali- whether a worker is an employee or an independent contrac-
ties test. Beyond these factors, the court also considered the tor, a court may consider each and every circumstance of the
manner in which the work relationship was terminated (that is, employment relationship.
by one or both parties and with or without notice or explana-
tion), whether annual leave was provided to the workers, whether THE PROPER CLASSIFICATION OF A WORKER as an employee
retirement benefits were provided to them, and whether the em- or independent contractor at the beginning of an employ-
ployer paid Social Security taxes for the workers. ment relationship is important to both employers and work-
In concluding that Diggs was not an employee, the court ers with respect to their obligations and protections under
found that physicians privileges at Harris Hospital were not Federal law. Although the classification does depend on the
necessary to Diggs practice; that is, if Diggs were denied Federal law being applied, the overriding factor is who has
those privileges, her ability to obtain them at other area hos- the right to control the work process, and the relationship
pitals would not have been restricted. Focusing on the con- is based upon all of its characteristics, regardless of what
trol factor, the court also found that, although the hospital both label the employer applies to the worker.34
Notes
1
The figures reported are for the broadest of the Bureaus three 11
29 U.S.C. 201 et seq.
measurements of the contingent workforce. For additional informa- 12
tion, see the BLS news release, Contingent and Alternative Work Ar- 42 U.S.C. 2000(e) et seq.
rangements, February 2001. 13
29 U.S.C. 621 et seq.
2
By the criteria of the survey, a worker may be in both a contin- 14
29 U.S.C. 1001 et seq.
gent and an alternative work arrangement, but is not automatically 15
so, because contingent work is defined separately from alternative 42 U.S.C. 12101 et seq.
work arrangements. 16
29 U.S.C. 2601 et seq.
17
3
American Heritage Dictionary of the English Language, 1978. 29 U.S.C. 151 et seq.
18
4
Henry Campbell Black, Blacks Law Dictionary (St. Paul, MN, West Federal law provides employers with a safe-harbor provision to
Publishing Co, 1991), p. 363. avoid a retroactive IRS reclassification of workers as employees where
an employer had a reasonable basis for treating a worker as an inde-
5
Ibid., p. 530. pendent contractor. An employers good faith in making the determi-
6
See, for example, Mark Diana and Robin H. Rome, Beyond Tra- nation is required for the safe harbor to apply.
19
ditional Employment: The Contingent Workforce, 196 APR N.J. Law 8, The case has an extensive procedural history throughout the
*9 (April 1999). 1990s. For the opinion of the Ninth Circuit Court of Appeals regard-
7
ing the status of the Microsoft workers focused on in this article, see
26 U.S.C. 3101 et seq. 120 F.3d 1006.
8
26 U.S.C. 3301 et seq. 20
The IRS used its 20-factor test in making its determination
9
26 U.S.C. 3401 et seq. regarding the employees status. (For details of the test, see next sec-
tion in the text.)
10
In many cases, an independent contractors true employer is the 21
The District Court used the common-law test in making its
contracting agency, which would be subject to these Federal laws. In determination regarding the employees status. (For details of the test,
addition to the Federal laws that protect employees, additional State see next section in the text.)
laws, including those which provide workers compensation benefits,
22
typically protect employees, but not independent contractors. 490 U.S. 730 (1989).