By: Christina M. Reger

As an employment lawyer working with budding businesses, I so frequently hear, “I need to hire.” After congratulating the employer on its success, I ask about the new position. I often hear, “oh, I am just going to hire a contractor,” or “that person will be a 1099,” or worse, “I can’t afford an employee so I am just going to pay them as a 1099.”

The Fair Labor Standards Act (‘the FLSA”) is the federal regulation that establishes minimum wage, overtime pay, and record-keeping requirements affecting workers in the private sector. It is enforced by the United States Department of Labor (“DOL”) and the federal courts. The FLSA was originally enacted in 1938 to protect workers from abusive working conditions and ensure that they would be paid a living wage. The FLSA has been revised several times, and amendments are currently pending to increase the threshold for minimum wage, which has received significant press over the last several years.

But I digress. The FLSA applies only to employees, so what does this have to do with me hiring a 1099, you might ask. Determining whether a worker should be an independent contractor or an employee has little to do with how you, the employer, decide to pay them, or even if you have a contract or agreement with them, and more to do with an analysis of their economic realities. This analysis has been a significant focus of the DOL and the courts for quite some time. In 2015, the Administrator of the DOL issued a Guidance, analyzing the history and intent of the FLSA, and concluding, after many, many pages, that most workers in this country are employees, and to the extent they are paid as contractors, they are misclassified.

So, when I hear from my entrepreneurs that they are growing and looking to bring on additional help, I review with them the economic realities test that our Supreme Court has set out. For example, I ask them if the services that are being provided are integral to the business, if the person will be working full-time and for how long. I also ask them about how much control this person has over their own work, whether they will be using their own tools, and whether they control their own profit and loss. The answers to these questions will have a significant bearing on what type of relationship this worker will have with the company.

Let’s take a bakery, for example. The bakery needs to hire a full-time baker who will be paid by the hour, to work on-site from 6am-3pm, Wednesday through Sunday. The bakery will provide all of the supplies and all of the tools. The baker is integral to the business of the bakery, she has minimal investment into tools and supplies and she has set hours and no control over her profit and loss (even if she works at another bakery on her days off). While she has creative control over what she bakes, her hours, days and rate of pay are set by the employer. The baker would be an employee under the law.

Now the bakery needs to be painted. They hire a painter, who charges a set fee for the job, brings all of his own supplies, invoices the bakery for the job, and puts the bakery on his schedule. The painter knows that if he can complete the job in two days instead of three, he can pick up another job and make more money. This worker has complete control over his schedule, how he paints, when the job is done and even how quickly it is done – thereby maximizing his ability to earn a profit. Even if he paints the bakery every 6 months, there is no permanency to his job. He also has all of his own tools and equipment and his services are not integral to that of the bakery. The painter should properly be an independent contractor.

I realize this example was quite straightforward. The determination as to whether a worker is an employee or an independent contractor is not always an easy one, and it should not be made willy nilly. There are significant federal and state laws that govern these relationships. Employers should consult their employment attorney before hiring to avoid the significant penalties that come with being wrong.

Helping small businesses avoid litigation from employees and applications in an environment where employment laws are changing every day. Posted by BLF Lawblog