When is a worker really in business for him or herself? This is the fundamental question addressed by the U.S. Department of Labor’s (DOL) Administrator’s Interpretation No. 2015-1, released July 15, 2015 (the Interpretation). According to the Interpretation, the answer is “not often.” The Interpretation is a comprehensive reflection of DOL’s view that independent contractor misclassification is common, and it exemplifies DOL’s persistent enforcement approach to this issue.
The Fair Labor Standards Act’s (FLSA) definition of “employ” includes “to suffer or permit to work.” 29 U.S.C. § 203(g). Citing Supreme Court precedent, the Interpretation takes a very broad view of when a worker is “suffered or permitted” to work. It notes that the phrase comes from pre-FLSA child labor laws, where its purpose was to prevent employers from disclaiming control over workers as a means of evading child welfare laws. That purpose is still evident in the present day “economic realities” test, applied by the DOL and courts to determine whether a worker is classified correctly under the FLSA. Like pre-FLSA laws, the economic realities test considers multiple factors in addition to the control factor. In the Interpretation’s view, the economic realities test is meant to determine whether the worker is “economically dependent” on the employer on the one hand, or in business for him or herself, on the other hand. To illustrate, the Interpretation analyzes each factor of the economic realities test, asking and answering a familiar set of questions:
- Is the work an integral part of the employer’s business? Work may be considered integral if it produces the product the company is in the business of selling, and according to the Interpretation, workers who perform such work are more likely to be employees. For example, baseball players are integral to the business of a baseball club, but concessions workers may not be.
- Does the worker’s managerial skill affect the worker’s opportunity for profit or loss? Per the Interpretation, contractors have the ability to profit by making business decisions. Deciding to work more hours may earn a worker more money, but if the increase is not the result of the worker’s managerial skill, DOL would find this factor weighs towards employee status.
- How does the worker’s relative investment compare to the employer’s investment? The DOL believes that a contractor should invest in his own business to a degree that is beyond what is necessary to perform the job for the employer. Further, DOL says the investment should not be “relatively minor” compared to the employer’s investment.
- Does the work performed require special skill and initiative? Many workers have a high degree of technical skills, but the DOL states that a contractor applies those skills in a way that shows business-like initiative, such as by marketing them.
- Is the relationship between the worker and the employer permanent or indefinite? The Interpretation states that this factor weighs towards contractor status if, as a result of business initiative, a worker works for multiple entities on a project by project basis. On the other hand, permanent or indefinite relationships indicate employee status.
- What is the nature and degree of the employer’s control? The Interpretation states that contractors exercise actual control over meaningful aspects of the work, and not solely their work schedules. The DOL warns against giving this factor undue weight because it believes economic dependence can exist even when the employer exercises relatively little control.
According to the Interpretation, each question should be answered with an eye towards the ultimate determination of whether the worker is an economically independent businessperson. Furthermore, the DOL clearly expects that, in most cases, applying the Interpretation will show that the worker is an “economically dependent” employee.
Although the Interpretation is not binding legal authority, it is a clear effort by DOL to advertise its position on worker classification and its intent to conduct enforcement actions accordingly.
Notably, the Interpretation does not address classification within the growing “on-demand” economy, at least not outside the frame of the economic realities test. As courts and observers have recognized, the economic realities test does not apply neatly to so-called “dependent contractors,” i.e., those who retain a high degree of economic independence, yet are often dependent on a single employer. See Cotter v. Lyft, Inc., 60 F. Supp. 3d 1067, 1069 (N.D. Cal. 2015) (“At first glance, Lyft drivers don’t seem much like employees . . . [b]ut Lyft drivers don’t seem much like independent contractors either); O’Connor v. Uber Technologies, Inc., No. C-13-3826 EMC, 2015 WL 1069092, at *15 (N.D. Cal. Mar. 11, 2015) (“It is conceivable that the legislature would enact rules particular to the new so-called “sharing economy.”) It remains to be seen whether cases like these will lead to new guidance, or an altogether new designation of workers.
In the meantime, DOL continues its enforcement efforts per the guidelines set forth in the Interpretation. In fact, on the same day the Interpretation was released, became the twenty-third state to sign a joint enforcement agreement, under which DOL and state agencies share information and coordinate enforcement. These developments are a reminder to employers that government agencies view misclassification as a large problem that hinders the broader effort to cover more employees under the FLSA’s minimum wage and overtime requirements.
We previously wrote about that effort in the context of DOL’s new proposed overtime rules, which narrow certain overtime exemptions.
In light of the Interpretation, employers should proactively review worker classification practices for compliance. Any review should recognize that all working relationships are unique, and must account for all factors of the economic realities test and applicable state law.