Lasting economic downturns cause many companies to consider more cost-effective and flexible ways to utilize labor forces. To limit costs, companies often turn to use independent contractors in order to avoid paying benefits, limit overhead, and increase flexibility. But when can someone hired as an “independent contractor” actually be deemed an employee, exposing the company to unplanned risks?

The Washington State Court of Appeals held on December 20 that a worker is an “employee” for purposes of wage and hour law not under the common law “right to control” test, but rather on the more employee-favorable “economic realities” test. Anfinson v. FedEx was brought by two route drivers who argued that their class of worker was not an “independent contractor,” but rather an “employee” for purposes of Washington’s Minimum Wage Act (WMWA), and as a result entitled to overtime compensation for all hours worked over 40 in a work week. After a four week trial on the classification, the jury was instructed to use a “right to control” test and found in favor of the Company. The Court of Appeals reversed, holding that instead an “economic realities” test should have been applied. The Court believed that under that test, no single factor is determinative, but that depending on the “circumstances of the whole activity” and ultimately, “whether as a matter of economic reality, the individual is dependent on the business to which he renders service.” In other words, even a worker over whom the Company did not retain the right to control could be deemed an “employee” if the economic reality of the relationship bound the worker to the business. The Court also found instructive the factors established by the Department of Labor & Industries: (1) the degree of control that the business has over the worker; (2) the worker’s opportunity for profit or loss depending on managerial skill; (3) the worker’s investment in equipment or material; (4) the degree of skill required; (5) the degree of permanence of the working relationship; and (6) the degree to which the worker’s services are an integral part of the business.

As a result of this decision, many more individuals currently considered “contractors” will be classified under Washington State law as “employees” and entitled to minimum wages, overtime, breaks, and meal periods. Employers should review each of their independent contractors to determine whether they pass the more-stringent “economic realities” test under WMWA, and consult legal counsel.