The Obama administration has been actively seeking opportunities to expand the scope and breadth of wage and hour rules applicable under the Fair Labor Standards Act (“FLSA”). For example, the Department of Labor (“DOL”) recently announced a proposed rule that would double the minimum salary threshold required to qualify for a “white collar” exemption under the FLSA to almost $48,000 per year. In addition, the DOL has recently filed lawsuits accusing companies such as Fed Ex and Uber of misclassifying workers.
This recent activity reflects the DOL’s belief that an increasing number of employees are being misclassified as independent contractors. According to the DOL, this trend of utilizing an increasingly larger number of workers classified as independent contractors has been reflected in the construction, technology and other industries.
When is an Individual an Independent Contractor?
On July 15, 2015, David Weil, the Administrator for the DOL’s Wage and Hour Division, issued an Administrator’s Interpretation (“Interpretation”) of when an individual is an independent contractor.
According to the DOL, it is attempting to alter what it refers to as the “problematic trend” of employers misclassifying workers as independent contractors. This Interpretation is being issued to offer “guidance” on the application of standards to determine who are employees under the FLSA. It does not have the force of law but it reflects how the DOL is viewing this issue when it investigates companies accused of misclassifying employees and identifies appropriate cases for litigation.
One goal of the Interpretation is to promote use of the broadest definition of “employee” possible for FLSA cases. In fact, according to this Interpretation, “most workers are employees under the FLSA.” The key question for the DOL is whether a worker is economically dependent on an employer (and thus is an employee) or if the worker is really operating his or her own business (and thus an independent contractor). This is analyzed using a six-factor “economic realities” test that considers the “totality of circumstances” to make a determination.
Will this DOL Interpretation Impact Employers?
Of concern to employers, the DOL Interpretation states that misclassification is being addressed in a multi-pronged approach, as reflected by memoranda of understanding with “many states” and the Internal Revenue Service. Although Indiana and Ohio have not entered into any understandings with the DOL, the Kentucky Labor Cabinet just entered into a three-year agreement with the DOLto share information and coordinate law enforcement on July 15, 2015. (See more information on the DOL website here.)
This issue has significant potential economic impact on employers if their independent contractors are misclassified. If independent contractors are determined to have been employees, the employer could be liable for minimum wages, overtime compensation, workers’ compensation, unemployment insurance, health insurance coverage, and employment withholding taxes, to name a few. In addition, these “new” employees may be able to assert statutory protections, such as state and federal civil rights and anti-discrimination laws prohibiting harassment, discrimination and retaliation.
Companies that have workers providing services as independent contractors should contact employment counsel and closely scrutinize the economic realities factors in light of the Interpretation issued on July 15. This is especially true for employers in the service industry (nursing and cleaning services, for example) as well as the construction industry. Even if the DOL’s Interpretation does not have the equivalent of law, it clearly reflects the DOL’s current intent to alter any trend or effort to misclassify employees.