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Posted on Tuesday, July 21, 2015

Independent Contractor or Employee? New DOL Guidance Concludes Most Independent Contractors are Misclassified.

The U.S. Department of Labor (“DOL”) recently issued an Administrator’s Interpretation addressing the common misclassification of employees as independent contractors under the Fair Labor Standards Act (“FLSA”). The misclassification of employees as independent contractors may lead to those employees failing to receive certain workplace protections, such as minimum wage and overtime compensation under the FLSA. The DOL concludes that most workers qualify as employees under the FLSA’s definition.Employers often use the common law “control test” to determine whether a worker is an employee or an independent contractor. The “control test” analyzes whether a worker is an employee or independent contractor based on the employer’s control over the worker. While the “control test” has been adopted by courts in the context of other employment statutes, the DOL makes clear that the FLSA’s broad definition of “employ” as including “to suffer or permit to work” is more expansive than the control test. The agency says that for purposes of determining FLSA applicability, the focus must be on the economic realities of the relationship – that is, “whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor).” The guidance then discusses the six factors that courts have developed to determine whether a worker is an employee or independent contractor under this “economic realities” test.

The six factors to be considered in determining whether a worker is an employee or an independent contractor for purposes of the FLSA are: “(A) the extent to which the work performed is an integral part of the employer’s business; (B) the worker’s opportunity for profit or loss depending on his or her managerial skill; (C) the extent of the relative investments of the employer and the worker; (D) whether the work performed requires special skills and initiative; (E) the permanency of the relationship; and (F) the degree of control exercised or retained by the employer.” The guidance states that these factors are not a checklist, but are to be “examined and analyzed in relation to one another.” The analysis is qualitative, not quantitative, and the FLSA’s intended expansive covered must be considered.

Given the broad statutory definition of “employ” under the FLSA, the DOL concludes that most workers are employees that are economically dependent on their employer, and would not qualify as an independent contractor that is truly in business for him or herself. The DOL is concerned about the trend of misclassification of employees as independent contractors, especially in industries with low-wage workers.

While an employer may have independent contractor agreements with its workers, such agreements are not relevant to the analysis of the workers’ status under the FLSA. In light of this guidance from DOL, employers should review whether their independent contractors are properly classified, or if they are employees under the “economic realities” test. If these workers are misclassified, employers should take proactive steps to avoid or minimize potential litigation that could result in significant liability for unpaid wages and overtime.

Stephanie Wilson is an attorney at the Washington, DC business law firm, Berenzweig Leonard, LLP. She can be reached at SWilson@BerenzweigLaw.com.