On July 15, 2015, Department of Labor (DOL) Wage and Hour Division Administrator Dr. David Weil issued a memorandum of guidance (Memo) offering the DOL’s guidance on who qualifies as an “employee” under the Fair Labor Standards Act (FLSA), 29 U.S.C. § 201, et seq.[1]

The FLSA has defined the term “employ” as meaning “to suffer or permit to work.”[2] To interpret and apply the meaning of this phrase to real-world issues, courts have implemented an Economic Realities test to determine whether a worker is indeed an employee by establishing whether the worker is economically dependent on the employer or instead is in business for him- or herself. The Economic Realities test examines:

  • The extent to which the work performed is an integral part of the employer’s business.
  • The worker’s opportunity for profit or loss depending on his or her managerial skill.
  • The extent of the relative investments of the employer and the worker.
  • Whether the work performed requires special skills and initiative.
  • The permanency of the relationship.
  • The degree of control exercised or retained by the employer.

The DOL’s Memo analyzes the six-factor Economic Realities test in detail, noting several times the broad scope of employment and the “suffer or permit” standard ascribed in the FLSA. The Memo reminds employers that a company’s designation of a person as an independent contractor is not determinative in deciding whether the person is an employee, nor is the worker’s preference. The Memo also addresses several detrimental effects worker misclassification can cause, including non-receipt of important workplace protections such as the minimum wage, overtime compensation, unemployment insurance and workers’ compensation; lower tax revenues for the government; and the eventual uneven playing field for employers who properly classify their workers. While the DOL cited several examples of what may or may not constitute an employee-employer relationship, the main takeaway from this Memo is without a doubt the DOL’s clear stance on the definition of an employee: “[M]ost workers are employees under the FLSA’s broad definitions.”

The changing economy has prompted many employers to shift toward more unconventional hiring practices, landing several industry leaders that misclassified their workers in hot water.[3] For example, the California Labor Board recently ruled that Uber drivers are employees, and other recent decisions have found that FedEx drivers are employees.

In light of the extremely high costs associated with a potential FLSA class action lawsuit, all employers – small and large – would be well advised to ensure they are complying with wage and hour laws and regulations. Not only are local and state agencies focusing on compliance, but wage and hour cases are the fastest growing sector of private employment litigation.