Does your business engage independent contractors? If so, the Wage and Hour Division (WHD) of the US Department of Labor (DOL) is putting you on notice that your business may be in the agency’s cross hairs. In a 15-page “administrator’s interpretation” issued on July 15, 2015, WHD Administrator David Weil made clear that his agency, which in large part oversees the enforcement of the Fair Labor Standards Act (FLSA), views “[m]ost workers” as “employees” under the FLSA.
Although this new guidance appears to cast a large shadow on the independent contractor business model, it does not break any new ground substantively. It instead provides employers with a clear roadmap as to how the DOL views the existing “economic realities” test for independent contractor status and its relevant factors, which include: (1) the extent to which the work performed is an integral part of the putative employer’s business; (2) whether the worker’s managerial skills affect his or her opportunity for profit and loss; (3) the relative investments in facilities and equipment by the worker and the putative employer; (4) the worker’s skill and initiative; (5) the permanency of the worker’s relationship with the putative employer; and (6) the nature and degree of control by the putative employer. The critical inquiry for the WHD in determining whether a worker is an independent contractor, according to Administrator Weil, should be whether the worker is genuinely in business for himself or herself, or instead is economically dependent upon the putative employer. To guide that assessment, the WHD advises that the six “economic realities factors” should not be “analyzed mechanically or in a vacuum,” and that no one factor should be given too much weight.
This new guidance represents a larger effort by the DOL and the Obama administration to curb misclassification in the workplace, and comes on the heels of several high-profile cases in which companies have either lost or settled misclassification claims. It also follows the DOL’s recent proposed rule to revise the regulations regulating overtime exemptions under the FLSA. This, coupled with the WHD’s “Misclassification Initiative” with state governments and the Internal Revenue Service, leaves little doubt that misclassification issues will be a central DOL focus moving forward.
Perhaps most important for the future is the open question about whether the DOL’s strict dichotomy between “employee” and “independent contractor” suggested by this WHD guidance accurately describes newly emerging working relationships, including those in the so-called “sharing economy.” According to the WHD, although employers may choose to give their workers alternative titles such as “owners,” “partners” or “members,” such titles are not dispositive. What matters to the DOL is instead the economic reality of the relationship and whether the worker is truly economically dependent on the employer.
It is also important for employers to keep the new WHD guidance in context. Courts are not required to follow DOL guidance, as the Second Circuit recently demonstrated in a case involving unpaid interns. Employers also face a patchwork of different federal and state tests when determining whether to classify a worker as an independent contractor or an employee, and these tests often overlap. The test for federal employment discrimination laws, for example, is different than the test used for the FLSA. And states often apply different tests (even within the same state) to determine independent contractor status in relation to workers’ compensation, employment discrimination law protection and unemployment insurance issues. The WHD’s new guidance is just one piece of that regulatory puzzle, and is only reflective of the current administration’s view on public enforcement actions. That said, employers can expect to see a rise in private litigation attempting to use the new WHD guidance as a tool to persuade courts to adopt a more expansive view of “employee” under state and federal law.
Whether auditing your current employee classifications or defending against a private or public enforcement action, the global employment and labor practice group at Dentons is ready to help you navigate this complicated area of the law.