What is an Employee?

An employee is a stakeholder and representative agent of a firm. She may also be an owner of the firm, but her role as an employee is generally separate from that of owner. For purposes of employment law, it is important to distinguish an employee from an independent contractor. Most of the employment laws apply to the relationship between employer and employee and specifically exclude the independent contractor relationship.

 In a dispute concerning whether an individual is an employee or an independent contractor, administrative agencies and courts generally employ some version of the following tests:

What is the Control Test?

The control test applies numerous factors regarding the extent of an employer's control over the employee or independent contractor. This test seeks to measure the extent to which the agent is an extension of and answerable to the employer. An employee is engaged by a business to perform services under the guidance and supervision of the employer. These tasks are generally part of the core operations of the business. The employer will control the place, hours, and method of work. The employee generally works exclusively for the employer. An independent contractor, on the other hand, is an individual hired as an outside professional to perform services to a business. The employer maintains far less control over the independent contractor, who generally controls her own time and manner of performing services. Frequently, the independent contractor may have other clients and may employ her own employees.

Note: The control test is most notably employed by the Internal Revenue Service to determine employee status. Factors the IRS employs in making this determination include the employer's behavioral and financial controls over the agent. Further, it looks at the nature of the employer-agent relationship, such as the nature of the work agreement between the parties.

What is the Economic Realities Test?

This test seeks to determine the economic situation under which the individual performs services for the employer. It focuses on whether an agent is taking advantage of an employer's opportunity or whether an individual has their own business and is performing a necessary service to the employer. Factors examined in this determination include:

Does the agent have her own equipment and employees? How much control over the agent does the employer exercise? To what extent is the agent exposed to the opportunity for profit or loss? Is the relationship temporary or permanent in nature? How integrated into the employer's business is the agent's activity? How much independent thought, decision making, and initiative is charged to the agent? How independent is the agent's business organization?

Note: This test is primarily used by the Department of Labor to determine employee status.

Example: A business may hire a marketer, accountant, attorney, etc., to perform work for the business. These individuals are not employees. They have their own businesses.

Related Topics

• Employment Law (Intro)
• Who is an employee under the employment law?
• Subcontracting
• What characterizes the employer-employee, At-Will relationship?
• What are the major employment laws?
• What are the taxation requirements imposed upon employers?
• What is the Fair Labor Standards Act (FLSA)?
• Exempt Employee 
• NonExempt Employees
• Family Medical Leave Act (FMLA)?
• Worker Adjustment and Retraining Act (WARN Act)?
• Occupational Safety and Health Act (OSHA)?
• Employee Retirement Income Security Act (ERISA)?
• Active Participant Status
• Defined Benefit Plan
• Pension Plan
• Accumulated Benefit Obligation
• Defined Contribution Plan
• Cash Balance Plan
• Pension Benefit Guaranty Corporation
• Blackout Period
• Benefit Allocation Method
• Multinational Pooling
• DB(k) Plan Definition
• Employee Contribution Plan
• Unit Benefit Plan
• Top Hat Plan
• Non-Discrimination Rule
• Alternative Minimum Cost Method
• Consolidated Omnibus Budget Reconciliation Act (COBRA)?
• Health Insurance Portability and Accountability Act (HIPAA)
• Workers Compensation Laws?
• Workers Compensation Coverage A Definition
• Workers Compensation Coverage B Definition
• Federal Unemployment Tax Act
• State Unemployment Tax Act
• Voluntary Termination
• Employment Verification Laws?
• Form I-9
• Workplace Privacy Laws?
• Background Checks
• Davis-Bacon Act
• Loudermill Rights
• Work Opportunity Tax Credit
• Work for Hire Agreement (Independent Contractor Agreement)
• Engagement Letter Definition
• Non-Compete Agreement
• Non-Solicitation Clause
• Wrongful Termination Claim
  
• What are labor laws?
• Organized Labor
• Collective Bargaining Agreement
• Labor Union
• What are the major labor laws?
• Department of Labor
• What is the National Labor Relations Act?
• Unfair Labor Practice
• Right to Work Laws
• Labor Management Relations Act
• Labor Management Reporting and Disclosure Act