What’s the difference between an employee and an independent contractor?
A new Nevada case clarifies the economic realities test.
Many Nevada employers can be easily confused over the difference between employees and independent contractors, and it goes far beyond whether someone receives a form W-2 or form 1099. Failure to appreciate this distinction and misclassifying an employee can subject a business to thousands of dollars in fees and penalties from both the State of Nevada and the federal government, as well as backpay damages to the employee. So, how can a Nevada business properly classify an independent contractor from an employee and avoid getting into trouble?
The FLSA follows the “economic realities” test and defines an employee as someone “who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which he or she serves.” FLSA Fact Sheet #13. An independent contractor, by contrast, is someone in an independent trade or profession who is not under the control of an employer regarding what work will be done and how. Instead, the employer can generally only have a say in the outcome or result of the work (think, for example, contractor, dentist, doctor, lawyer, accountant). IRS – Independent Contractor Defined.
Problems arise when a business tries to classify an employee as independent contractor. In a recent Nevada Supreme Court case, Doe Dancer I v. La Fuente, Inc., 137 Nev. Adv. Op. 3, 481 P.3d 860 (2021), the court examined whether exotic dancers at a gentlemen’s club were actually employees for the purpose of being entitled to minimum wage. The club tried to classify the dancers as independent contractors, saying the dancers could perform if they had a valid sheriff’s card, a work license, costume and “were not trashed” when they showed up for work.
At first blush, it would appear that the dancers are independent contractors because the club was not controlling the how and what work (dancing) would be done – they were only controlling the outcome – that the exotic dancers dance at the club. However, once the exotic dancers’ shifts began, the club imposed a host of rules upon them, from minimum heel and costume requirements to how they interacted with guests, their own personal hygiene, and even transportation and parking. The dancers were not permitted to leave the club unless checking out with the manager or club DJ and the club even restricted who could visit the dancers during their shift.
In determining that the exotic dancers were not independent contractors, the Nevada Supreme Court affirmed the use of the federal “economic realities” test to define the scope of an employee for the purpose of minimum wage. Applying those factors, the court concluded the exotic dancers really were employees of the club based on the amount of control the club had over them and the fact the dancers were an integral part of the club’s business.
For businesses looking to use independent contractors, the factors a court may examine to determine whether that person really is an independent contractor 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.
FLSA Fact Sheet #13. These are the same factors the Nevada Supreme Court considered in the Doe Dancer I case above. If the working relationship is more permanent, the independent contractor’s work is integral to the employer’s business, and the employer has a great degree of control over the independent contractor, such as dictating when the independent contractor must show up for work and how the work is to be performed, then those factors indicate that the independent contractor is actually probably an employee and not truly an independent contractor.
NRS 608.0155 also provides a list of factors that Nevada businesses can use in determining when a person is an independent contractor versus an employee.
Nevada businesses must use caution because misclassification of an employee as an independent contractor can be costly. For example, NRS 608.400 provides that willfully misclassifying an employee as an independent contractor can result in monetary penalties by the Labor Commissioner of $2,500 for the first offense, and then $5,000 thereafter for each employee who is misclassified. This is in addition to the lost wages, benefits, or other economic damages an employer may owe the employee to make them whole.
When in doubt, it is always best to consult with legal counsel on the proper classification of employees to avoid the legal ramifications that come with misclassifying persons as independent contractors. If you have questions, contact an attorney at Lemons, Grundy & Eisenberg to see if we can assist you.