Profit and Fair Play: How Economic Theories of Entrepreneurship Can Help Us Recognize an Employee When We See One

Abstract

This paper proposes a three-part test to help simplify worker classification and connect the law with the overall purposes of our economic system. Existing legal tests struggle to provide justifiable and workable guidance for courts, employers, and workers. One recent response has been an increased focus on entrepreneurship. However, neither courts nor scholars have paid sufficient attention to economic theories of entrepreneurship to inform their reliance on the concept. By drawing from classic economic theories of entrepreneurship, this paper will argue that a worker should be considered an employee unless she assumes entrepreneurial responsibility within her economic relationship with the hirer and that entrepreneurial responsibility consists of three elements: (1) the assumption of liability for economic uncertainty; (2) the exercise of control over the allocation of resources being combined to sell in the market; and (3) participation in the market discovery process by buying resources to sell in the market in the pursuit of profits. Aside from its simplicity and wide-ranging applicability, the proposed three-part test is superior to other existing tests for employee status because it corresponds with the principle of fair play and the very reasons why we organize our economic activities within markets and firms. Because our economic system is a cooperative enterprise within which we organize our economic activity into markets and firms so that we can all benefit from an efficient allocation of resources, the principle of fair play suggests that it would be unfair for economic actors to benefit privately by circumventing the bifurcation of work into markets and firms in our economic system. This principle can explain and justify a wide variety of the need for distinguishing employees from independent contractors in a parsimonious and unified way.