For years, even decades, there has been discussion and thought in the Employment Law community that the concept of Independent Contractors would become extinct. Somehow, they have survived, although I believe that they are on the endangered species list. Recently, the Department of Labor released Administrator's Interpretation No. 2015-1, “The Application of the Fair Labor Standards Act's ‘Suffer or Permit' Standard in the Identification of Employees Who Are Misclassified as Independent Contractors”. This document is a sign of DOL's intent to vigorously pursue its interpretation of the FLSA, consistent with other governmental agencies, such as the EEOC, who are also ramping up their agendas.
The Administrator's Interpretation makes it clear that the “Economic Realities Factors Should Be Applied in View of the FLSA's Broad Scope of Employment and ‘Suffer or Permit' Standard.” By cherry picking language from various court cases, going back as far as 1918, the DOL sets forth a 6 step test to determine if a worker is an “employee” or an “independent contractor”. These 6 steps are:
- Is the work an integral part of the employer's business? “If the work performed by a worker is integral to the employer's business, it is more likely that the worker is economically dependent on the employer.”
- Does the worker's managerial skill affect the worker's opportunity for profit or loss? “A worker in business for him or herself faces the possibility to not only make a profit, but also experience a loss…On the other hand, the worker's ability to work more hours and the amount of work available from the employer have nothing to do with the worker's managerial skill and do little to separate employees from independent contractors-both of whom are likely to earn more if they work more and if there is more work available.”
- How does the worker's relative investment compare to the employer's investment? “The worker should make some investment (and therefore undertake at least some risk for a loss) in order for there to be an indication that he or she is an independent business.”
- Does the work performed require special skill and initiative? “A worker's business skills, judgment, and initiative, not his or her technical skills, will aid in determining whether the worker is economically independent.”
- Is the relationship between the worker and the employer permanent or indefinite? “Permanency or indefiniteness in the worker's relationship with the employer suggests that the worker is an employee. After all, a worker who is truly in business for him or herself will eschew a permanent or indefinite relationship with an employer and the dependence that comes with such permanence or indefiniteness.”
- What is the nature and degree of the employer's control? “As with the other economic realities factors, the employer's control should be analyzed in light of the ultimate determination whether the worker is economically dependent on the employer or truly an independent businessperson. The worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business.”
The Administrator's Interpretation concludes, in part, with the following:
In sum, most workers are employees under the FLSA's broad definitions. The very broad definition of employment under the FLSA as to ‘suffer or permit to work' and the /Act's intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or independent contractor.The factors should not be analyzed mechanically or in a vacuum, and no single factor, including control, should be over-emphasized…
Practice pointers. So, what does all this mean? The DOL sees a “problematic trend” of employers misclassifying workers as independent contractors, instead of employees. If a worker is misclassified, there are numerous issues that arise, including the proper tax withholdings, retirement benefits, unemployment compensation and workers' compensation coverage, non-compete/non-solicitation/trade secret protection, health insurance coverage, overtime compensation and Title VII considerations. If an employer misclassifies an employee as an independent contractor, the above mentioned items can be very costly, including 2-3 times the actual amount of wages owed and attorney's fees.
Many companies have already been impacted by the increased scrutiny on the misclassification of workers. Uber drivers in California have been found to be employees. UPS and FedEx have been found to have misclassified employees as independent contractors, costing millions of dollars. Homejoy, an on-demand cleaning company, has shut down, due in large part to “recent lawsuits that have sought to reclassify its contract workers as employees.”
The DOL will be coordinating with the IRS and OSHA, as well as numerous states, including Alabama, to investigate the possible misclassification of workers as independent contractors. In the budgeting process, the DOL has asked for an additional $32 million to hire 300 new full-time enforcement officers and support staff to investigate possible misclassification of workers.
As with many governmental agencies, although their interpretation of the laws may be persuasive with the courts, the courts do not have to, and many times, do not, accept their interpretations. It will take a number of years for the Administrator's Interpretation to wind its way through the courts, and may ultimately have to be decided by the Supreme Court.
Now is the time for Employers to evaluate their classification of workers, either as employees or independent contractors. The DOL, other governmental agencies (such as the IRS) and private attorneys will continue to turn up the heat with investigations and lawsuits into misclassification.