How do you determine if a worker is an independent contractor or an employee?

Employers and employees alike are often confused whether a worker is an independent contractor or employee.  The distinction is crucial: if an independent contractor, the employer is not responsible for overtime and minimum wages under the Fair Labor Standards Act, income tax withholding on wages, the employer's share of payroll taxes, and workers compensation liability.  Employers who misclassify workers as independent contractors rather than employees face liability, including penalties.  Furthermore, misclassification issues have recently become an enforcement priority for the United States Department of Labor.

In Virginia and North Carolina, courts look to the economic realities of the relationship to determine whether a worker is an independent contractor or an employee of an employer.  As the Fourth Circuit Court of Appeals recently stated, "The touchstone of the 'economic realities” test is whether the worker is 'economically dependent on the business to which he renders service or is, as a matter of economic [reality], in business for himself.'"  Courts look at six factors to evaluate the economic reality of any particular relationship:

1.  The degree of control that the putative employer has over the manner in which the work is performed;

2.  The worker’s opportunities for profit or loss dependent on his managerial skill;

3.  The worker’s investment in equipment or material, or his employment of other workers;

4.  The degree of skill required for the work;

5.   The permanence of the working relationship; and

6.   The degree to which the services rendered are an integral part of the putative employer's business.

The analysis is adapted to the particular working relationship, the particular workplace, and the particular industry in each case.

As a result of the approach of courts to this question, the answer to whether a worker is properly classified as an independent contractor or an employee is highly fact-specific.