What Is an Employee? the Answer Depends on the Federal Law; in a Legal Context, the Classification of a Worker as Either an Employee or an Independent Contractor Can Have Significant Consequences. (What Is an Employee?).(United States Labor legislation)(Statistical Data Included)

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In the American workplace today, a full-time, 40-hour-a-week employee who stays with the same employer performing the same job over the course of an entire worklife would be viewed as a rarity, or at least as a person found in lesser proportion in the U.S. workforce than in decades past. Today's workplace includes a variety of workers in contingent arrangements--independent contractors, leased employees, temporary employees, on-call workers, and more--perceived to be a result of employers' desire to reduce labor costs and employees' desire to increase their flexibility, among other things. The Bureau of Labor Statistics recently reported that in February 2001 the contingent workforce, or those workers who do not have an implicit or explicit contract for ongoing employment and who do not expect their current job to last, totaled 5.4 million people, roughly 4 percent of the U.S. workforce. (1) According to the BLS survey, millions more were employed in alternative work arrangements: (2) 8.6 million independent contractors (representing 6.4 percent of total employment), 2.1 million on-call workers, 1.2 million temporary help agency workers, and 633,000 contract company workers. The Bureau treats these contingent workers and workers in alternative work arrangements as part of total U.S. employment, and although they are in a typical employment situation, most of the general public would probably consider them employees.

But how does Federal law treat workers in contingent and alternative work arrangements? That is, are such workers viewed as employees who are entitled to legal protections under Federal legislation? As is frequently the case with legal questions, the answer depends--in this case, on the Federal law at issue. In general, though, courts evaluate the totality of the circumstances surrounding a worker's employment, with a focus on who has the right--the employer or the employee-to control the work process.

The question "Is a worker an employee?" may seem like a simple one to answer on its surface. The dictionary definition of "employee" says succinctly that an employee is "a person who works for another in return for financial or other compensation." (3) Under that definition, independent contractors would appear to be employees. However, the legal definition of "employee" is concerned with more than the pay received by a worker for services provided. Black's Law Dictionary defines "employee" as "a person in the service of another under any contract of hire, express or implied, oral or written, where the employer has the power or right to control and direct the employee in the material details of how the work is to be performed." (4) In contrast, an "independent contractor" is one who, "in the exercise of an independent employment, contracts to do a piece of work according to his own methods and is subject to his employer's control only as to the end product or final result of his work."(5) This legal distinction as to how a worker must be classified has broad implications--and potentially negative consequences for mischaracterization--for both employers and workers alike.

This article examines how the legal determination is made that a worker is either an employee or an independent contractor, beginning with a discussion of why the determination is important and then discussing the tests used by courts to make the determination and the laws pursuant to which each test applies.

Employee or independent contractor?

Employers have used independent contractors and other contingent workers more frequently in recent times for a variety of reasons, including reducing the costs associated with salaries, benefits, and employment taxes and increasing the flexibility of the workforce. (6) Under U.S. law, employers are required to pay the employer's share, and withhold the worker's share, of employment taxes for employees, but not for independent contractors. Employment taxes include those collected pursuant to the Federal Insurance Contributions Act (FICA) (7) for the U.S. Social Security system; those collected pursuant to the Federal Unemployment Tax Act (FUTA), (8) which pays unemployment benefits to displaced workers; and income tax withholding. (9)

U.S. law imposes other obligations on employers with respect to employees that are not imposed on independent contractors. (10) The Fair Labor Standards Act (FLSA) (11) requires employers to meet minimum-wage and overtime obligations toward their employees. Title VII of the Civil Rights Act of 1964 (12) prohibits employers from discriminating against their employees on the basis of race, color, religion, sex, or national origin, while the Age Discrimination in Employment Act (ADEA) (13) prohibits employers from discriminating against employees on the basis of their age. The Employment Retirement Security Act (ERISA) (14) sets the parameters of qualified employee benefit plans, including the level of benefits and amount of service required for vesting of those benefits, typically in the context of retirement. The Americans with Disabilities Act (ADA) (15) prohibits employers from discriminating against qualified individuals who have disabilities. The Family and Medical Leave Act (FMLA) (16) requires employers to provide eligible employees with up to 12 weeks of unpaid leave per year when those employees are faced with certain critical life situations. The National Labor Relations Act (NLRA) (17) grants employees the right to organize and governs labor-management relations.

Clearly, then, some incentive exists for employers to classify their workers as independent contractors rather than employees, in order to reduce costs and various legal obligations. However, the failure of an employer to make the proper determination as to whether workers are employees or independent contractors can have dire consequences. Employers who are careless in their labeling of workers as independent contractors risk exposure to substantial liability in the future under Federal law if the workers are mischaracterized. The U.S. Government--in particular, the Internal Revenue Service (IRS)--can seek to recover back taxes and other contributions that should have been paid by the employer on the employee's behalf, (18) and the workers themselves can seek compensation for job benefits that the employer denied them on the basis of their supposed status as independent contractors.

One of the most striking examples of the danger of mischaracterizing workers as independent contractors rather than employees occurred in Vizcaino v. Microsoft, (19) a case in which …