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Aug 18, 2022

Q&A: Can we convert an employee into an independent contractor?

Q&AEmployee ClassificationsWage and Hour 

Question: Our employee is retiring soon, but we’d like her to finish a few projects after she retires. We don’t want to provide benefits, so we’d like to have her sign a contract saying she’s working as an independent contractor. Are we okay doing this?

Answer: It’s unlikely that you’d be able to justify classifying your retired employee as an independent contractor, even with a contract. A recent case examined the difference between an employee and independent contractor under the federal Fair Labor Standards Act (FLSA). In the case, a trucking company had contracts with drivers designating them as independent owner-operators, rather than employees. One driver filed a lawsuit under the FLSA for failure to pay minimum wage. Under the FLSA “economic realities test,” a court can use a variety of factors to determine whether an individual is an employee or truly engaged in a business of their own (i.e. an independent contractor). In this case, the court examined control over the work, opportunity for profit or loss, investment in equipment, special skills required, duration of the relationship, and how integral the services provided were to the company’s business. Notably, the court determined that the contract between the parties did not control the nature of the relationship, stating that the “FLSA is designed to defeat rather than implement contractual arrangements.” (Brant v. Schneider National, Inc., 7th Cir, Aug 2022).

Because a retiree returning to finish up projects would generally be doing work that is integral to the company business, wouldn’t typically have other clients, and wouldn’t generally have an opportunity to make a profit or loss, the FLSA economic realities test would likely point to them being an employee rather than independent contractor. Also, keep in mind that the FLSA economic realities test is just one evaluation you need to make in determining how to classify an individual; other federal and state agencies use their own criteria to make that determination. To learn more about how to determine independent contractor status, see our Legal Guide Independent Contractor or Employee? and contact your Vigilant Law Group employment attorney when a specific situation arises.

This website presents general information in nontechnical language. This information is not legal advice. Before applying this information to a specific management decision, consult legal counsel.