1. 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 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:
• Control Test – The control test applies numerous factors regarding the extent of an employer’s control over the employee or independent contractor. This test seek 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.
• Economic Realities Test – This tests 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 in 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 individual are not employees. They have their own businesses.
• Discussion: Do you think the status of an independent contractor or employee should matter for purposes of employment laws? Why or why not?
• Practice Question: ABC Corp is considering hiring someone to perform auditing functions for the corporation. What do you need to know to determine whether ABC should hire an outside firm as an independent contractor or an internal employee to carry out the duties?