Is it time to face economic reality? Kentucky Supreme Court Adopts Economic Realities Test for Classifying Employees in Workers’ Compensation Cases

The Supreme Court of Kentucky recently amended its test for determining whether an individual is an employee or independent contractor under the Kentucky Workers’ Compensation Act. In Oufafa v. Taxi, LLC, a taxi driver was shot by a passenger and suffered permanent paralysis. After the incident, the driver filed a claim for workers’ compensation benefits, but the taxi company denied the claim on the basis that the driver was an independent contractor and not an employee.

In the workers’ compensation proceeding, the administrative law judge (“ALJ”) affirmed the company’s denial of benefits, ruling that the driver was an independent contractor. The ALJ’s decision was reversed by the Workers Compensation Board (“the Board”), which found the driver to be an employee, which was later reversed by the Kentucky Court of Appeals, which held that the driver was an independent contractor.

After reviewing the case’s history and the various and sometimes conflicting factors in determining whether an individual is an employee or independent contractor, the Supreme Court of Kentucky reversed the Court of Appeals and remanded for further review. The Supreme Court determined that a new test was necessary to determine if an individual is an employee or an independent contractor for workers’ compensation cases. Id. at 599-600.

Following its holding in Mouanda v. Jani-King Int’l, in which the Supreme Court adopted the “economic realities” test for wage-and-hour disputes arising under the Kentucky Wages & Hours Act, the Supreme Court likewise adopted the “economic realities” test for determining if an individual is an employee or independent contractor for workers’ compensation cases.

Under the “economic realities” test, which is currently employed by the federal courts when construing wage-and-hour protections under the Fair Labor Standards Act, the Kentucky courts will consider six factors when determining whether a worker is an employee or independent contractor:

  1. The permanency of the relationship between the parties;
  2. The degree of skill required for the rendering of the services;
  3. The worker’s investment in equipment or materials for the task;
  4. The worker’s opportunity for profit or loss, depending upon his skill;
  5. The degree of the alleged employer’s right to control the manner in which the work is performed; and
  6. Whether the service rendered is an integral part of the alleged employer’s business.

Prior to Oufafa, the Kentucky courts utilized a four-factor test to resolve disputes over worker classification. Noting the various difficulties in applying this former test, the Supreme Court announced that the “economic realities” test was the better and more efficient method “to discern the actuality of the working relationship.”

While there is significant commonality between the “economic realities” test and the prior standard, the “economic realities” test removes one of the prior factors, the intention of the parties. In addition, the Supreme Court noted that the central inquiry under the “economic realities” test is “the worker’s economic dependence upon the business for which he is laboring.” Ultimately, by removing the intent of the parties and by emphasizing a worker’s economic dependence on a business, the Supreme Court has signaled that this trend toward use of the “economic realities” test won’t be limited to wage-and-hour and workers’ compensation matters. Indeed, the Supreme Court stressed that it “did not limit itself when it recently adopted the economic realities test” and that the employee/independent contractor designation determines an individual’s entitlement “to many statutory employment protections.” If the Supreme Court continues to expand the use of the “economic realities” test, likely targets include statutory protections related to unemployment insurance benefits, occupational safety and health protections, and anti-discrimination and anti-retaliations protections under the Kentucky Civil Rights Act, among others.

Do you have questions regarding how the “economic realities” test will impact your organization’s current designations of employees and independent contractors? Do you need actionable insight to ensure your business is protected from legal exposure related to employee and contractor classifications? Let’s connect.


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