On July 15, the Department of Labor Wage and Hour Division (WHD or Department), published Administrator’s Interpretation No. 2015-1, guidance intended to clarify the scope and definition of “employee” under the Fair Labor Standards Act (FLSA or Act). The guidance is the latest undertaking in the Department’s recent crackdown on worker misclassification, an issue that the Department sees as especially problematic. The Department maintains that the improper classification of employees as independent contractors may cause such workers to miss out on workplace protections such as minimum wage, overtime pay, unemployment insurance, and workers’ compensation; result in lower tax revenues for the government; and distort the playing field for compliant employers. The Department notes that complaints of misclassification are on the rise, and in response, it has brought an increased number of successful enforcement actions and has joined efforts with several states to combat misclassification by forming “misclassification task forces.” The Department intends for the guidance to be “helpful to the regulated community in classifying workers and ultimately in curtailing misclassification.”
The guidance first explains that the FLSA’s definition of employer as “to suffer or permit to work” was “designed to ensure as broad of a scope of statutory coverage as possible” and as such, should be applied broadly so that more employment relationships are protected under the Act. In determining whether a worker is an independent contractor or employee under the FLSA, the multi-factor “economic realities” test should be used. These factors include: (1) the extent to which the work performed is an integral part of the employer’s business; (2) the worker’s opportunity for profit or loss depending on his or her managerial skill; (3) the extent of the relative investments of the employer and the worker; (4) whether the work performed requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer.
The guidance offers the following key considerations to keep in mind when applying these factors and determining whether they weigh for or against employee status:
- 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. A true independent contractor’s work, on the other hand, is unlikely to be integral to the employer’s business. Work can be integral to a business even if the work is just one component of the business and/or is performed by hundreds or thousands of workers.
- In considering whether a worker has an opportunity for profit or loss, the focus is whether the worker’s managerial skill can affect his or her profit and loss. 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, as both employees and independent contractors may earn more if they work more. Instead, the focus should be on whether the worker exercises managerial skills and whether those shills affect the worker’s opportunity for both profit and loss.
- If a worker makes some investment in his or her own business, this is in an indication that he or she is an independent business from the employer. However, if the investment is relatively minor compared to the employer’s investment in its overall business, this suggests that the worker and the employer are not on similar footings, and that the worker may be an employee who is economically dependent on the employer. An independent contractor’s investment in his or her own business must be significant in nature and magnitude to the employer’s investment in its overall business in order to indicate that the worker is an independent business person.
- A worker’s business skills, judgment, and initiative – not his or her technical skills – will help determine whether the worker is economically independent.
- Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee. An independent contractor typically works one project for an employer and does not necessarily work continuously or repeatedly. However, a lack of permanence or indefiniteness does not automatically suggest an independent contractor relationship. The reason for the lack of permanence or indefiniteness should be reviewed to determine if the reason is indicative of the worker’s running an independent business.
- To be considered an independent contractor, 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. Further, this control must be more than theoretical—the worker must actually exercise it.
The guidance stresses that these factors are controlling, and the label an employer gives a relationship is non-dispositive. For example, agreements identifying workers as independent contractors and Forms 1099-MISC, which indicate the worker is engaged as an independent contractor, are not relevant. Instead, the guidance concludes:
The ultimate inquiry under the FLSA 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. If the worker is in business for him or herself (i.e., economically independent from the employer), then the worker is an independent contractor.
This guidance comes at the heels of a DOL-proposed rule broadening overtime protections and is indicative of the Department’s increased attention to workers’ rights. Given this trend, along with the Department’s position that “most workers are employees under the FLSA,” and its focus on independent contractor misclassification, employers should review their practices and policies to ensure that workers are properly classified.