Businesses should carefully assess any independent contractor arrangements in light of an “Administrator’s Interpretation” issued on July 15, 2015 by the U.S. Department of Labor’s Wage and Hour Division (DOL). While the DOL’s Interpretation is not binding legal precedent, its Wage and Hour Division pursues enforcement actions against employers based on misclassifications of workers as independent contractors.

The Interpretation makes clear that the DOL takes an expansive view of which individuals are properly considered employees rather than independent contractors. The DOL’s enforcement actions are part of an aggressive Misclassification Initiative, which involves cooperation with 23 states (including Minnesota, Missouri and Colorado), the IRS, the Employee Benefits Security Administration, the Occupational Safety and Health Administration, the Office of Federal Contract Compliance Programs, and the Office of the Solicitor.

The DOL’s Interpretation is based on the Fair Labor Standards Act’s (FLSA) definition of “employ” as “to suffer or permit to work” and the “economic realities” test subsequently developed by the Supreme Court and federal appellate courts. It cites Supreme Court precedent supporting the view that the “suffer or permit” standard was specifically designed to ensure the broadest possible scope of statutory coverage.

An entity “suffers or permits” an individual to work if as a matter of economic reality, the individual is dependent on the entity. In order to determine whether a worker is an employee or an independent contractor under the FLSA, courts apply the following multi-factor “economic realities” test:

  • the extent to which the work performed is an integral part of the employer’s business;
  • the worker’s opportunity for profit or loss depending on his or her managerial skill; 
  • the extent of the relative investments of the employer and the worker;
  • whether the work performed requires special skills and initiative;
  • the permanency of the relationship; and
  • the degree of control exercised or retained by the employer.

Each factor is to be examined and analyzed in relation to one another, and no single factor is determinative. The DOL stresses in its Interpretation that the application of the factors is to be guided by the “overarching principle that the FLSA should be liberally construed to provide broad coverage for workers," as evidenced by the “suffer or permit to work” definition.

The Interpretation notes that an agreement between an employer and a worker designating or labeling the worker as an independent contractor is not indicative of the economic realities of the working relationship and is not relevant to the analysis of the worker’s status. The ultimate inquiry, according to the DOL, is whether the worker is economically dependent on the employer or truly in business for him or herself. If the worker is economically dependent on the employer then the worker is an employee regardless of what label is used. If the worker is in business for him or herself, then the worker is an independent contractor.

Employers who improperly classify workers as independent contractors rather than employees have potential liability under the wage and hour laws (minimum wage and overtime), ERISA (failure to provide benefits), tax laws (failure to withhold and to pay FICA/FUTA), and workers compensation laws (failure to provide coverage). In the last fiscal year (2014), DOL investigations have resulted in more than $79 million in back wages for 109,000 workers, in industries such as janitorial, temporary help, food service, day care, hospitality and garment manufacturing.

Employers should review their independent contractor arrangements carefully to assess compliance with the above standard. In particular, employers should examine closely the status of workers who are engaged full time, who have no other clients or customers and who have made little or no investment in their own business.