Independent Contractor vs. Employee

This fact sheet provides general information concerning the meaning of "employment relationship" and the significance of that determination in applying provisions of the Fair Labor Standards Act and Wage and Hour Act.

Characteristics:

An employment relationship under the FLSA/WHA must be distinguished from a strictly contractual one. Such a relationship must exist for any provision of the FLSA/WHA to apply to any person engaged in work which may otherwise be subject to the FLSA/WHA. In the application of the FLSA/WHA, an employee, as distinguished from a person who is engaged in a business of his or her own, is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which he/she serves. The employer-employee relationship under the FLSA is tested by "economic reality" rather than "technical concepts." It is not determined by the common law standards relating to master and servant.

The U. S. Supreme Court has on a number of occasions indicated that there is no single rule or test for determining whether an individual is an independent contractor or an employee for purposes of the FLSA. The Court has held that it is the total activity or situation which controls. Among the factors which the Court has considered significant are:

• The extent to which the services rendered are an integral part of the principal's business.
• The permanency of the relationship.
• The amount of the alleged contractor's investment in facilities and equipment.
• The nature and degree of control by the principal.
• The alleged contractor's opportunities for profit and loss.
• The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
• The degree of independent business organization and operation.

There are certain factors which are immaterial in determining whether there is an employment relationship. Such facts as the place where work is performed, the absence of a formal employment agreement, or whether an alleged independent contractor is licensed by State/local government are not considered to have a bearing on determinations as to whether there is an employment relationship. Additionally, the Supreme Court has held that the time or mode of pay does not control the determination of employee status.

If you believe that you are being misclassified, please contact the Employee Classification Division of the NC Industrial Commission via email: emp.classification@ic.nc.gov or by telephone: (888) 891-4895 or fax: (919) 508-8300. .

Requirements:

When it has been determined that an employer-employee relationship does exist, and the employee is engaged in work that is subject to the FLSA/WHA, it is required that the employee be paid at least the minimum wage, which is currently $7.25 an hour, and time and one-half his/her regular rate of pay for all hours worked in excess of 40 per week. The Act also has child labor provisions which regulate the employment of minors under the age of eighteen (youth employment under the WHA), as well as record keeping requirements. The WHA also has wage payment provisions.

Typical Problems:

• One of the most common problems is in the construction industry where contractors hire so-called independent contractors, who in reality should be considered employees because they do not meet the tests for independence, as stated above.
• Franchise arrangements can pose problems in this area as well. Depending on the level of control the franchisor has over the franchisee, employees of the latter may be considered to be employed by the franchisor.
• A situation involving a person volunteering his or her services for another may also result in an employment relationship. For example, a person who is an employee cannot "volunteer" his/her services to the employer to perform the same type service performed as an employee. Of course, individuals may volunteer or donate their services to religious, public service, and non-profit organizations, without contemplation of pay, and not be considered employees of such organization.
• Trainees or students may also be employees, depending on the circumstances of their activities for the employer.
• People who perform work at their own home are often improperly considered as independent contractors. The Act covers such homeworkers as employees and they are entitled to all benefits of the law.

This fact sheet is also used by the North Carolina Department of Labor, Wage and Hour Office, for the administration and enforcement of the North Carolina Wage and Hour Act.

For more information about workplace rights, please contact our toll free number at 1-800-NC-LABOR (800-625-2267).