Employment by Design: Employees, Independent Contractors and the Theory of the Firm

Abstract

Employment laws protect “employees” and impose duties on their “employers.” In the modern working world, however, “em ployee” and “employer” status is not always clear. The status of some workers and the firms they serve can be ambiguous, espe cially when the workers work as individuals not organized as firms. Individual workers might be “employees,” but they might also be self-employed individuals working as “independent con tractors.”1 Even if it is clear that workers are someone’s “em ployees,” the identity of the employer can be unclear. If one firm pays “employees” to work mainly or exclusively for another firm that pays the first firm for the work, which firm is the “employer” of the employees? Courts resolve these questions with a multi-factored test de scended from nineteenth century “master-servant” law, centered on an alleged employer’s “control” of the work, and supple mented by an accumulation of “economic reality” factors.2 The multi-factored test has been widely criticized for nearly a cen tury.3 The Supreme Court criticized the test more than 70 years