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Title VII Claims and the Economic Realities Test

Title VII [42 USC § 2000(e)] defines an “employer” as a person or entity who employs 15 or more employees in 20 or more calendar weeks in the current or preceding calendar year. The term “employee” is only loosely defined as “an individual employed by an employer.” Importantly, Title VII prohibits discrimination by an employer against any individual “with respect to terms, conditions, and privileges of employment.” Once a company or person reaches the status of “employer” under the statute, there may be liability exposure for claims that independent contractors were essentially functioning as employees and therefore entitled to the same privileges and conditions as employees.

Why is the distinction important if Title VII protects any individual, whether an employee or independent contractor? What is meant by the statutory provision is that an employer cannot choose to speciously label one worker as an employee and another as an independent contractor, for the purpose of paying one less than the other or providing less benefit coverage for one than the other, or otherwise illegally discriminate between them. If two workers are substantially performing the same work, for purposes of Title VII claims of discrimination, both will be deemed employees and the employer will be required to treat them equally in “terms, conditions, and privileges of employment.”

In adjudicating such claims and controversies, courts often refer to what is known as the “economic realities” of the employment relationship to make a determination of status as applied to the facts presented. In applying an “economics reality test” to the situation before it, a court will review the employment relationship of the parties to see if the worker in question is actually functioning as an employee, because the worker performs most of his work for the employer and derives most of his income from the employer. Conversely, if the worker held himself and his services out to several companies, and derived his overall income from several of them, he might be more appropriately deemed an independent contractor.

Still, other courts find the economic realities test too superficial, and instead look to the common law for guidance. Under the common law standard, the primary emphasis is on a review of the degree of control and autonomy the worker has over his hours, methods used to complete the work, and materials used for the work. If the employer only looks to the end result, the worker is more likely an independent contractor. A milestone court decision on this matter was the case of Viscaino v. Microsoft Corp, (9th Circuit, 1997). Microsoft had routinely brought in outside “independent contractors” to work on various software programs. Microsoft needed their expertise, but made them sign contract agreements, in which they understood that they were not employees of Microsoft. Many of them worked several years in this capacity for Microsoft, and ultimately, a group of them filed suit under ERISA, hoping to recover lost pension and other benefits. Microsoft defended that these individuals were “independent contractors” and had accepted the work with that knowledge and understanding. The Court thought otherwise. It found that the workers had assigned desks, assigned phone numbers, and were otherwise treated essentially as Microsoft employees. In fact, the only difference was that they did not receive company-paid benefits. Microsoft lost the case.

Inside Title VII Claims and the Economic Realities Test