Florida businesses often wonder, “what is the difference between an independent contractor and an employee?” Worded differently, “what is the difference between a 1099 worker and a w-2 employee?”
These are important questions for Florida companies, because there are significant consequences to a Florida business if it gets this wrong.
As an employment lawyer who exclusively represents Florida employers (not employEEs), a significant issue that I see is when a Florida company makes a mistake and misclassifies a worker as a 1099-worker or a contractor, and the worker really should be classified as an employee. This implicates various laws, but in my law practice I see it most often when dealing with the Fair Labor Standards Act (FLSA).
The FLSA requires a Florida business to maintain payroll records and pay minimum wage and overtime only to employees. This means that the FLSA applies to those workers whom the FLSA defines as “employees.” An “employee” under the FLSA is any individual whom an employer suffers, permits, or otherwise employs to work. This definition is very broad, but it was not intended to make every worker an “employee.” For example, independent contractors are not “employees.” This means that workers may be independent contractors when their work does not in its essence follow the usual path of an “employee.”
The U.S. Department of Labor has consistently interpreted an “employee” to be distinguished from a person who is engaged in business for himself or herself. According to the Labor Department, an employee is considered to be a worker who, as a matter of economic reality, follows the usual path of an employee and is dependent upon the business to which he or she renders service. The employer-employee relationship under the FLSA is tested by economic reality rather than technical concepts. This means that a Florida employer cannot just have a worker sign a document and think that it magically makes the worker an independent contractor, rather than an employee. The Department of Labor, and Florida courts, will look at what the worker actually does and what arrangements have been made between the worker and the business to prevent the worker from doing certain things that employees would normally be expected to do.
What does this mean to a human resource professional in Florida who is trying to make sure that they properly classify a worker as an independent contractor?
Well, this means that the key to focus on when determining whether a worker is an employee versus independent contractor, is the “economic dependence” of the worker.
Florida HR professionals and Florida businesses should realize that the Supreme Court has provided guidance: a worker’s “dependence” should be assessed in light of the purposes of the FLSA. This means that although the terms “employ” and “employee” are very broad under the FLSA, they do not cover a worker who works only for his own interest. This means that the FLSA’s broad definition of “employee” does not include independent contractors.
Florida businesses should understand that whether a worker is economically dependent on a potential employer is a fact-specific inquiry that is individualized to each worker. If the worker is unable to work on his or her own terms, that often suggests dependence, which suggests that the worker is an employee, and not an independent contractor.
What does this mean to your Florida company? Well, independent contractors are often characterized by their ability to, for example, regularly negotiate working conditions or simultaneously work for another business. If a worker works on a project-by-project basis, it suggests that the worker is an independent contractor. Stated differently, the ability of a worker to simultaneously draw income by working for others, such as by working for a competitor, indicates considerable independence.
So, a Florida business owner may wonder, what factors does the Department of Labor look at when investigating whether the company improperly classified a worker as an independent contractor? When determining economic dependence, the Department of Labor investigators in Florida consider six factors derived from Supreme Court precedent: (1) The nature and degree of the potential employer’s control; (2) The permanency of the worker’s relationship with the potential employer; (3) The amount of the worker’s investment in facilities, equipment, or helpers; (4) The amount of skill, initiative, judgment, or foresight required for the worker’s services; (5) The worker’s opportunities for profit or loss; and (6) The extent of integration of the worker’s services into the potential employer’s business.
I will analyze each of these factors below, but Florida business owners should understand that other factors may also be relevant, and the appropriate weight to give to each factor depends on the facts. Additionally, the determination of employee vs. independent contractor status does not depend on the six factors listed, but rather upon the circumstances of the whole activity. This means that the Department of Labor investigators in Florida do not determine employee status by simply counting factors, but by weighing these factors in order to answer the ultimate inquiry of whether the Florida worker is engaged in business for himself or herself, or is dependent upon the business to which he or she renders service.
Control. The first factor is the nature and degree of the potential employer’s control. A Florida business may have control where it, for example, requires a worker to work exclusively for the business; does not allow the worker to work for or interact with competitors during the working relationship; work against the interests of a competitor; work inflexible shifts, achieve large quotas, or work long hours, so that it is impracticable to work elsewhere; or otherwise face restrictions on or sanctions for external economic conduct, among others. Caselaw show us that a business relinquishes control over a worker and thereby makes the worker less economically dependent when it allows the worker to work for its competitors or draw income through work for others. Stated in a different way, a Florida business will probably be found to control a worker if it causes the worker to have no viable economic status that can be traded to other companies, such that the worker cannot operate as a separate economic entity. This means that it is likely that a Florida company will be found to have significant control over a worker if the worker is not permitted to work for other businesses while in the company’s service. This is because “employees” generally work for only one employer, sometimes using an exclusive employment agreement. However, true independent contractors tend to be able to work for multiple clients.
A Florida company will increase the likelihood of being found to not exert control over a worker if it gives the worker significant flexibility, including the ability to pursue external economic opportunities. It would be helpful for Florida businesses that want the workers to be independent contractors if the workers have complete autonomy to choose the hours of work that are most beneficial to them. For example, if the Florida company does not even require the workers to perform a minimum amount of work, such freedom would enable the worker to pursue any and all external opportunities at their leisure. Also, even if the worker is allowed to work full-time in your Florida business, if the worker chooses not to do so, that may indicate that they are pursuing other jobs outside your business, which is something an independent contractor might do.
If your Florida company allows the worker the right to work simultaneously for competitors, and the worker routinely does so in order to maximize their profit, that is indicative of a lack of control by the business. This is because a worker that works on a project-by-project basis suggests independent contractor status. If the Florida company allows this, it will have relinquished control over the worker’s external opportunities.
If your company allows the worker to cancel jobs in order to pursue external opportunities for a competitor, that indicates independent contractor status. If your business does not inspect a worker’s work for quality or rate a worker’s performance, that suggests independent contractor status. For example, if you do not impose requirements on how the worker must perform their work, if you are not present when the worker works, and if you do not monitor, supervise, or control the particulars of that work, this suggests a lack of control over the worker. Such a lack of control weighs in favor of the worker being in business for himself. It is helpful when drafting an independent contractor agreement if the worker has complete autonomy to choose the hours of work that are most beneficial to them, may simultaneously work for competitors of your business without repercussions, and if they are subject to minimal, if any, supervision by your business.
Permanency of relation. The second factor is the permanency of the worker’s relationship with the potential employer. Permanence arises where a business in Florida, for example, requires a worker to agree to a fixed term of work; does not allow the worker to work for or interact with competitors after the working relationship ends; or the worker otherwise faces restrictions on or sanctions for leaving the job in order to pursue external economic opportunities, among others. When a company has a permanent working relationship with a worker, that would be indicative of an employer-employee relationship. This is because a permanent relationship tends to restrict external opportunities. Additionally, the existence of a long-term working relationship may indirectly indicate permanence. There is caselaw that has found permanency where the workers could not work for other companies, were required to work long hours, and could not turn down work orders, such that their relationship was not only of long duration, but was also exclusive). However, there has been caselaw finding no permanency where the length of the working relationship was a product of a mutually satisfactory arrangement.
Ideally, if the goal is to create an independent contractor relationship, it would be helpful for the Florida business to allow the worker to maintain a high degree of freedom to exit the working relationship. For instance, it would be helpful towards creating an independent contractor arrangement if the company does not restrict the worker from interacting with competitors, either during the relationship itself or after the relationship ends.
Even if your Florida business maintains a lengthy working relationship with the worker, if your company does so only on a project-by-project basis, that factor would weigh strongly in favor of independent contractor status.
Investment in facilities, equipment, or helpers. The third factor is the amount of the worker’s investment in facilities, equipment, or helpers. If a Florida business makes these investments and provides them to a worker, that worker may come to rely on the business to supply those investments in order to perform his or her services. This means that the capital investment factor is looked at to see whether it reveals that the worker performs a specialized service that requires a tool or application which he has mastered or that the worker is simply using implements of the company to accomplish the task. If the worker relies on the business to supply tools, facilities or equipment, that could make it more difficult for the worker to pursue other economic opportunities, thereby increasing the worker’s economic dependence – and increasing the likelihood that the worker is an employee.
Conversely, greater investments by the worker into facilities, equipment, or helpers enable workers to more easily pursue external opportunities, thereby increasing their independence. One case found that worker investments are analogous to the independence any worker has who has gained experience and the ability to market themselves to competing employers.
Therefore, it would help your Florida company make an argument that a worker is an independent contractor if the business does not invest in facilities, equipment, or helpers on behalf of the worker. Instead, it would be better if your Florida business requires the worker to purchase all necessary resources for their work, and if your business does not reimburse those purchases.
What is the skill, initiative, judgment, and foresight required by the worker? The fourth factor is the amount of skill, initiative, judgment, and foresight required for the worker’s services. Even if a business profits from a worker’s work, it may be determined that the business’s profits were not because of the worker’s initiative, judgment, or foresight, as would be expected from a typical independent contractor. This could be the case if the company profits resulted from work that was simply more like piecework. For example, if a Lyft or Uber driver toggles back and forth between different car companies and personal clients, and decides how best to obtain business from clients, that will increase the worker’s personal profits through their initiative, judgment, or foresight, indicating their considerable independence.
This factor may also look to, for example, whether the worker has the skills necessary to locate and manage discrete work projects that are characteristic of independent contractors, as opposed to skills of the task-specific, specialized kind that form a piece of a larger enterprise.
Another relevant factor is how did the worker acquire his skill? If the Florida company provides all workers with the skills necessary to perform the job, that suggests “employee” status and not “independent contractor” status. So, the relevant inquiry for the skill factor is whether the worker is dependent upon the Florida company to equip her with the skills necessary to perform her job.
If the worker is able to choose between different opportunities and competing businesses (your competitors) and exercise managerial discretion in order to maximize their own profits, this will show considerable independence from your business.
Another helpful aspect would be if the worker does not undergo mandatory training. This would allow your business to argue that because the worker does not rely on your business to provide them with training, it also increases their economic independence. This is because courts have held that skills obtained through an employer’s training are less indicative of independent contractor status. Thus, if a worker exercises managerial discretion and has a lack of training from your business, it would weigh in favor of independent contractor status.
Opportunity for profit and loss. The fifth factor is the worker’s opportunities for profit or loss. These opportunities typically exist where the worker receives additional compensation based, not on greater efficiency, but on the exercise of initiative, judgment, or foresight (e.g., commission); has flexibility to renegotiate compensation throughout the working relationship; or has capital expenditure at risk in the job. This means that Florida businesses should look at whether a worker’s ability to earn more is due to being more technically proficient, which indicates employee status, or instead due to managerial skill, which indicates independent contractor status. Courts focus on who, the alleged employer or worker, controls the major determinants of profit or loss and who exercises the managerial skills on which profit or loss depend.
If the worker places capital expenditure at risk, that indicates independent contractor status.
Opportunities for profit or loss can indicate independent contractor status even if the worker is not solely in control of his or her profits or losses.
If a worker does not receive a predetermined amount of compensation for their work, but instead controls the major determinants of profit or loss, that suggests independent contractor status. Even if your Florida business sets default prices, but allows the worker to choose different types of jobs with different prices, take as many jobs as they see fit, and negotiate the price of their jobs, that would demonstrate the worker’s opportunity for profit and loss.
Integrality. The sixth factor is the extent of the integration of the worker’s services into the potential employer’s Florida business. For example, a worker’s services are integrated into a Florida business if they form the primary purpose of that business. Specifically, an ultrasound technician would not be integrated into a medical center’s business if ultrasounds are not the heart of its business.
This means that it is more likely to indicate independent contractor status if the worker is performing a task that is not the main business of the company. So, using the example of a law firm (which is a business) that has lawyers working are unlikely to have the lawyers qualify as independent contractors because the type of work that lawyers perform is the main business of a law firm. However, if that law firm has a lawn service mow its grass, or an IT professional maintain its computers, those tasks are less integral to the business, and those type of workers are more likely to be found to be independent contractors.
What Florida employers should take from these Department of Labor factors?
Although the FLSA is very broad in its scope of coverage, it does not mean that all workers are employees. Florida businesses can take steps to work with an experienced employment attorney to increase the chance that their independent contractor agreements are valid and that the workers will be found to be independent contractors, rather than employees.
Because the FLSA does not turn all workers into employees, it allows workers the freedom to operate as independent contractors and remain outside the FLSA’s scope.
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What is the difference between a 1099 worker and a w-2 employee in Florida?