On July 15, the Department of Labor (DOL) issued a 15-page “Interpretation” from the Administrator of the DOL’s Wage & Hour Division to provide employers with “additional direction” for classifying their workers under the Fair Labor Standards Act (FLSA) and to curtail what the Administrator refers to as the “problematic trend” of workers being misclassified as independent contractors. While this Interpretation does not carry the force of law, the DOL will no doubt look to it in enforcing the FLSA’s overtime and minimum wage requirements. Moreover, it is fair to assume that the National Labor Relations Board, Equal Employment Opportunity Commission, and other federal and state administrative agencies may cite this Interpretation to support their findings and conclusions, particularly those determining that workers are employees rather than contractors. The DOL plainly states in this Interpretation that many workers now are being misclassified, and that the Interpretation is being issued as part of a “multi-pronged approach” to address these misclassifications. Thus employers who engage what they have classified as independent contractors to perform duties should recognize that the DOL has them in its sights as to possible liabilities and penalties.
As a prelude to this stepped-up enforcement activity, the DOL in this Interpretation reaffirmed that it will apply a multi-factor “economic realities” test to address classification issues that takes into the consideration the following six factors: (1) the extent to which the worker’s work is an integral part of the employer’s business; (2) whether the worker’s managerial skill affects the worker’s opportunity for profit or loss; (3) how the worker’s relative investment compares to the employer’s investment; (4) whether the work performed requires special skill and initiative; (5) whether the relationship between the worker and the employer is permanent or indefinite; and (6) the nature and degree of the employer’s control.
The Interpretation states that the FLSA’s definition of “employ” - “to suffer or permit to work” -- is an expansive concept that was “specifically designed to ensure as broad of a scope of statutory coverage as possible.” With this in mind, the Administrator states that if the “economic realities” test is employed consistent with this desire for broad coverage, “most workers are employees under the FLSA.” The Interpretation emphasizes that the ultimate inquiry should be whether the workers is “economically dependent on the employer or in business for him or herself.” The key under this “economic realities” test appears for the DOL to be the degree of economic dependence or independence.
Whether reviewing agencies and courts shift away from the emphasis on “right of control” in the current reported authority toward this broader “economic realities” test remains to be seen. In the meantime, given DOL’s clear signal that it intends to review contractor status under this broader standard, employers should review their current contractor relationships to determine potential liabilities. Employers are likely to see a rise in claims from government agencies, contractors and/or their attorneys claiming employee status and seeking payment into social security, Medicare, unemployment insurance, and workers’ compensation insurance on behalf of these workers; participation in employee benefits plans such as group medical and pension plans; protection under non-discrimination laws and the FMLA; the right to bargain collectively with coworkers as to terms and conditions of employment, etc.