What is the Federal Economic Realities Test - California Employment Lawyers

What is the Federal Economic Realities Test?

When a federal court has to determine whether a worker is an employee or a contractor, it uses something called the economic realities test. In many ways, the economic realities test is a lot like the state of California’s manner and means test.

What is the Federal Economic Realities Test?

The federal economic realities test is a test that determines whether a person is an employee or contractor. It’s called that because the reality of the work a person performs determines the job’s requirements – the job title doesn’t mean much. For example, if your job title is “Freelance Graphic Designer” but your responsibilities are the same as an employee’s would be responsible for, it doesn’t matter that the company you work for threw the word freelance in your job title; it matters that you actually perform work in the same way that an employee would.

And that’s important because employees are entitled to protections under federal and state laws – protections that contractors do not have.

Related: Exploitation of employees through misclassification

What Determines a Worker’s Classification in the Economic Realities Test?

When determining the type of employment classification a worker falls under, several questions in the economic realities tests can point officials in the right direction, such as:

  • Does the business control when the work must be done and how long it will take? And if so, how much control does the business have?
  • Does the business reserve the right to assign the worker with additional projects?
  • Does the worker supply additional help when necessary (such as by hiring other people), or does the business provide them?
  • How do the parties handle taxes?
  • How does the business calculate the worker’s pay?
  • How long do the parties expect the business relationship to last?
  • How much skill is necessary to perform this specific job?
  • Is the work part of the business’s regular work, or does it fall outside the services or products the business normally offers?
  • Where is the work performed?
  • Who pays for the tools used for the job?

Each of these questions can determine whether a person is a contractor or an employee. There are other ways the courts determine the employment relationship, too; judges can consider any relevant factors that aren’t listed here.

Related: Major differences between 1099 employees and W-2 employees

It’s important to note that one of these questions alone can’t determine the nature of a business relationship. Instead, a look at the “big picture” does. For example, if the work is performed at the employer’s job site rather than in the worker’s home, that doesn’t necessarily mean that the worker is an employee – they may still be a contractor. All the other factors, such as whether the employer pays for the tools necessary for the job, whether the work falls into the business’s regular scope of services or products, and so much more will contribute to the final determination.

Related: 7 common employment law issues in California

Why Does the Economic Realities Test Matter?

Whether a person is a contractor or an employee affects several aspects of their employment, including whether the employer pays a portion of their taxes, whether they’re entitled to overtime protections, and even whether they’re entitled to protection against harassment and discrimination. It’s important to determine the type of business relationship between two parties to ensure that the worker is getting the protections they deserve and that the employer is upholding its end of the bargain when it comes to pay, taxes and protections.

Does the Economic Realities Test Matter in California Cases?

The economic realities test is a lot like California’s manner and means test, but it’s typically only used in federal cases. That’s because for the most part, California’s laws are more favorable to workers than federal laws are; when that happens, California courts defer to our state laws.

Do You Need to Talk to a Lawyer About Your Worker Classification?

If you suspect that you’ve been misclassified – or if you know it for sure – we may be able to help you. Call our office at 818-230-8380 or fill out the form below now to set up your free consultation with a Los Angeles and Glendale employment attorney.


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