If you require workers to be licensed, certified, and trained prior to accepting a temporary assignment, are they independent contractors or employees?

According to a recent case (Galarza v. One Call Claims, LLC), it depends on the economic reality of the working relationship rather than a stand-alone compelling factor. This means you need to look past the certifications required, labels assigned, or contracts signed before determining independent contractor vs employee status.

What Does “Economic Reality” Mean in Practice?

When courts and regulators talk about "economic reality" for determining employee or independent contractor status, they mean you should focus on what actually happens day-to-day rather than other technical concepts. According to the Fair Labor Standards Act (FLSA), the key aspect is to determine whether the worker depends on the company to earn a living, or if they are truly in business for themselves.

To focus on the true nature of the relationship, you should consider multiple factors: control, opportunity for profit or loss, investment in equipment and materials, skills required, permanency of the relationship, and whether the work provided is an integral part of the business. No single factor determines whether the worker is an employee or an independent contractor.

1. Control Over the Work

Common Indicators that the Worker is an Employee

• The business determines the worker’s schedule, tasks, and/or day-to-day instructions.
• The worker must follow company-imposed procedures or restrictions.
• The company controls how much the workers are paid, how many hours and days they work, if they can work for others, and/or monitors the quality of work.

Example:
A highly skilled carpenter who performs tasks exactly as instructed, without deciding the workflow, ordering materials, or planning future jobs, is exercising skill for the business in an employer-employee relationship rather than doing so independently for themselves.

Common Indicators that the Worker is an Independent Contractor

• The worker determines when and how work will be performed, typically setting their own hours and deciding how to perform work for each client.
• The worker negotiates rates, schedules, and the scope of each project, and may perform work for multiple clients as part of their own business.

Example: A nurse is free to select any clients she wants, negotiate wages paid, and set her own schedule. She operates her own business and determines how to perform work for each client.

2. Opportunity for Profit or Loss

Common Indicators that the Worker is an Employee

• Earnings vary only based on hours available or willingness to work.
• No meaningful business decisions affect profit or loss.

Example:
A cleaner who only takes assignments given by the cleaning company, does not advertise, does not set rates, and simply works more to earn more is not exercising managerial skill. This is an employment relationship.

Common Indicators that the Worker is an Independent Contractor

• The worker’s business decisions, including pricing, advertising, logistics, subcontracting, and hiring their own employees, affect earnings.

Example: A cleaner who markets her services, negotiates client contracts, hires helpers or her own employees, and chooses jobs demonstrates entrepreneurial skill. This is an independent contractor.

3. Investment in Equipment and Materials

Common Indicators that the Worker is an Employee

• The company provides the primary tools, vehicles, insurance, and/or supplies.
• The worker’s investment is minimal and tied only to individual jobs.

Example:
A cleaning worker receives health insurance, a company vehicle, and all supplies from the company, only occasionally bringing her own preferred cleansers.

Common Indicators that the Worker is an Independent Contractor

• The worker invests in significant equipment, business materials, or storage.

Example:
A cleaner purchases a commercial vehicle, rents space to store equipment, advertises services, and brings her own tools to every job. Her investment mirrors that of the company she sometimes contracts with.

4. Skill Required and Independent Initiative

Common Indicators that the Worker is an Employee

• Even high skill does not equal independence if the worker exercises no business judgment.

Example:
A technically skilled carpenter who is told exactly what to do, where to do it, and when to do it is functioning as an employee in an employment relationship.

Common Indicators that the Worker is an Independent Contractor

• Skilled workers use their expertise to operate a business, market their services, and select clients.

Example:
A carpenter who produces custom cabinets for many construction companies, markets the service, sets pricing, and orders materials independently acts as a business owner.

5. Permanency of the Relationship

Common Indicators that the Worker is an Employee

• The worker has a long-term, ongoing relationship with one company.
• They depend primarily on that one business for work.

Example:
An editor who works exclusively for an employer's business for years, using its publishing house tools and following its specifications, reflects an ongoing employee relationship.

Common Indicators that the Worker is an Independent Contractor

• The worker regularly contracts with multiple entities on a project-by-project basis.

Example:
An editor who works intermittently with 15 publishing houses and negotiates each job individually shows a lack of permanence and is likely a contractor.

6. Integral Part of the Business

Common Indicators that the Worker is an Employee

• The worker performs core business functions essential to the company’s operations.

Example:
Carpenters performing residential framing for a construction company are central to the company’s business and are therefore more likely to be employees.

Common Indicators that the Worker is an Independent Contractor

• The worker performs peripheral services that support but do not constitute the business’s primary function.

Example:
A software developer hired to build internal systems for a construction company is performing work not integral to the core service of framing homes.

What happens if employees are misclassified as independent contractors?

Misclassification of employee/independent contractor can expose employers to significant liability under the FLSA, tax laws, wage and hour rules, workers’ compensation, and unemployment systems. Misclassified workers may lose out on legal protections, access to unemployment insurance, minimum wage guarantees, and may not receive employee benefits when offered to staff. Employers may also be liable for back taxes, including unpaid social security taxes, unemployment taxes, and medicare taxes.

When trying to determine employment status, the DOL and courts continue to emphasize that the majority of work is performed by employees. True independent contractor relationships are far less common than many businesses assume.

Four-Step Compliance Plan for Employers

To reduce misclassification risk:

1. Review all your independent contractor relationships and ensure documentation is up to date. Remember, having a written agreement or labeling a worker as an independent contractor does not by itself determine the worker's status; classification depends on the actual working relationship and legal standards.

2. Use checklists or questionnaires based on relevant legal tests to evaluate each worker’s status. If you still are unsure, you can contact your Stratus HR rep or complete IRS Form SS-8 and have the IRS help you determine worker status.

3. Ensure payroll and tax procedures match the worker’s classification. For employees, employers must withhold and deposit income taxes, as well as Social Security and Medicare taxes. For independent contractors, these taxes are not withheld or deposited by the employer.

4. Train HR and management on the legal standards for classifying workers.

Employers should periodically review each worker's status to ensure ongoing compliance with classification requirements.

Final Takeaway

The DOL and courts increasingly view most workers as employees unless there is clear, consistent evidence of independent business activity. Even well-written contracts cannot shield employers from FLSA liability when the economic reality indicates employee status. In other words, satisfying one factor is not enough to qualify as an independent contractor.

Our rule of thumb: when in doubt, treat the worker as an employee.

For more information, please contact your certified HR rep. Not a current Stratus HR client? Book a free consultation and our team will contact you shortly.