Determining whether a worker is an independent contractor or an employee is important for a number of reasons, including: employee benefits, wage-and-hour laws, discrimination laws, payroll taxes and liability to third parties. Historically, a number of different tests have been applied to distinguish between employees and independent contractors. Recently the Washington Supreme Court held that the "economic realities" test used under the federal Fair Labor Standards Act also applies to cases brought under the Washington Minimum Wage Act.
Randy Anfinson and two other drivers filed a class action lawsuit against FedEx Ground Package System, Inc., on behalf of themselves and approximately 320 other FedEx Ground drivers. Although Anfinson and the other drivers had signed contracts with FedEx Ground stating that they were independent contractors, their complaint alleged that they were employees for purposes of the Washington Minimum Wage Act ("MWA") and should have been paid overtime wages.
The trial court certified the case as a class action and split the trial into two phases, the first to determine liability and the second to address damages. After a four-week trial on just the liability issues, the jury decided that the drivers were independent contractors, not employees, thus ending the case. The drivers appealed, and Division I of the Washington Court of Appeals reversed the trial court's decision. The Washington Supreme Court accepted review and agreed with the court of appeals. The supreme court found, among other things, that the trial court had given the jurors the wrong legal standard by which to determine whether the drivers were independent contractors or employees. Specifically, the trial court told the jurors:
In deciding "control" or "the right to control," jurors were instructed to consider the following factors:
- the degree of FedEx Ground's right to control the manner in
which the work was performed;
- the class members' opportunity for profit or loss depending
on one another's managerial skill;
- the class members' investment in equipment or materials
required for their tasks or their employment of others;
- whether the service rendered required a special skill;
- the degree of permanence of the working relationship;
- whether the service rendered was an integral part of FedEx
- the method of payment, whether by hours worked or by the job;
- whether the class members and FedEx Ground believed they were creating an employment relationship or an independent contractor relationship.
Jurors were told that neither the presence nor the absence of any individual factor was determinative.
"Economic Realities" Standard
The drivers argued that with a focus on "control" or "the right to control," the instruction erroneously stated the legal standard for distinguishing between employees and independent contractors under the MWA. The court agreed, finding that the proper standard is the "economic realities" test used by most federal courts to determine employee status under the Fair Labor Standards Act ("FLSA")—not the "control" or "right to control" standard. The "economic realities" test includes six factors:
- the permanence of the working relationship between the
- the degree of skill the work entails;
- the extent of the worker's investment in equipment or
- the worker's opportunity for profit or loss;
- the degree of the alleged employer's control over the
- whether the service rendered by the worker is an integral part of the alleged employer's business.
The court noted that the "control" test and the "economic realities" test overlap to some extent; for example, the fifth factor of the "economic realities" test, the "degree of the alleged employer's control," is essentially the same as the first factor of the "control" test. However, in this case, the court found that the primary focus of the two tests is different: Under Washington's "control" test, the most important inquiry is whether the employer has the right to control the details of the worker's performance, while under the FLSA test, the ultimate inquiry is whether, as a matter of economic reality, the worker is dependent on the alleged employer.
In concluding that the "economic realities" test was the proper standard for distinguishing between employees and independent contractors under the MWA, the court gave considerable weight to the fact that the MWA was patterned after the FLSA. It also recognized that most federal courts employ the "economic realities" test when making the same determination under the FLSA.
Anfinson v. FedEx Ground Package Sys., Inc., No. 85949-3 (Wash. July 19, 2012).
Under the "economic realities" test adopted for Washington law, the court expressly stated that more workers will be considered employees than under the "control" test. Nationwide, the status of independent contractors is a very hot topic for both workers and federal and state payroll and taxing authorities. Because there has been a marked increase in the number of cases claiming that workers classified as independent contractors are really employees subject to payroll taxes and protection of the wage-and-hour laws, employers who use independent contractors should carefully review their circumstances to be sure that the independent contractor status is appropriate.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.