Distinguishing Employees from Independent Contractors

There is no single test to determine whether a worker and the entity that he or she works for are in an employee-employer relationship or an independent-contractor-principal relationship. The determination is dependent both on the particular law applied and the factual circumstance of the case. The most important characteristic of independent contractors is that they have the right to control the manner in which the work is to be performed. Additionally, independent contractors are not extremely dependent upon the principal for their economic well being. This means that the independent contractors are free to provide services to more than one principal at any given time. This is referred to as the economic realities test. Under the common realities test, courts look at various factors including, but not limited to, the degree of control by the employer over the worker, investment in the business by the worker, skill requirement by the worker, and the extent the work is part of the employer's business.

Several other specific factors are often looked at by courts and government agencies in making employee/independent contractor determinations. The common law test, and the JRS-20 factor analysis are frequently used by courts to determine a worker's status. These factors are set forth in great detail in your text.

If you ever need to make a decision as to whether a worker is an employee or an independent contractor you can undertake a three-step process. First, consider the particular law or laws that the determination is critical to. Do you need to make the determination so that you, as an employer, can pay the worker time-and-a-half of an hourly rate if he or she works more than 40 hours a week? In that case, the applicable law would be the Fair Labor Standard Act (FLSA).

Second, after you have determined the appropriate laws, research court cases in which independent contractor/employee determinations have been made for purposes of those particular laws. Often, after looking at cases you can discover what particular factors are considered to be most important in making these determinations under the particular law or laws in question.

The third step is to attempt to find a case or cases under the laws applicable to business situations that are factually as similar as possible to the situation of your interest. For instance, if you are concerned about whether an attorney is going to be covered by Title VII for a gender discrimination claim, try to find Title VII cases involving independent contractor/employee determination where lawyers are the alleged employees. Such cases will be much more useful to you than a Title VII case where the alleged employee is a commission salesperson.

Remember, you may not always find an independent contractor/employee case under a particular law decided for the type of business or worker that you are concerned with. In such cases, make a determination by comparing your situation to the case or cases that are most similar, factually, to your situation

Example: Suppose that as the owner of a Pennsylvania company, which manufactures vacuum cleaners, you would like to use persons who are paid by commission to sell my products. Because you might face high unemployment-compensation liability if you have to discharge a large number of salespersons for not selling a set volume of products, you would like the salespeople to be considered to be independent contractors rather than employees. Possible steps may include:

1. Determine the applicable law; in this case it is the unemployment-compensation statute for the state of Pennsylvania.


2. Review cases decided under the Pennsylvania unemployment-compensation statute in which employee/independent contractor dispute are decided. Find several cases dealing with commission salespeople.


3. The third step is to find a case or cases as close as possible to the factual situation. In this case, there is a case which involves a sales representative of a vacuum cleaner manufacturer who had no assigned territories, was not required to have a minimum number of sales calls, was not required to attend meetings or file periodic reports, was free to set their own hours, was free to use any sales method, was free to hire help, and had to pay their own expenses and taxes. However, the representatives were prohibited from selling vacuum cleaners made by anyone other than the manufacturer with whom they had their contracts. The court concluded that they were employees rather than independent contractors even though they met the first requirement (free from control) for independent contractors. So what does this mean? Well, for Pennsylvania unemployment-compensation purposes, this case would inform you that you cannot require in the contract that they only sell your company's vacuum cleaners. Also the case provides you the information that, if you grant the sales representatives the types of freedom to control various aspects of how they perform their work, they will most likely satisfy the first part of the two-factor test indicating independent contractors.