DOL issued a 15-page memo last week about the potential misclassification of employees under the Fair Labor Standards Act (FLSA) as independent contractors. The take-away: DOL thinks most independent contractors are misclassified and should be considered employees. This memo is nothing new—it is merely an articulation of current law. But it is a reminder (as if we needed one!), that DOL, IRS, state taxing authorities, and plaintiffs lawyers everywhere are laser focused on this issue in the hope that employers get it wrong. As a reminder – liability for misclassification can be anywhere from 2-3 times the unpaid wages owed, plus attorney fees!
The main goal of the DOL memo is to clarify the definition of “employee” under the FLSA. DOL applies a six factor “economic realities” test:
- 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 skills
- The extent of the relative investments of the employer and the work
- Whether the work performed requires special skills and initiative
- The permanency of the relationship
- The degree of control exercised or retained by the employer
No one factor is dispositive and the analysis of these factors will be unique to your business, but employers should consider a few key explanations provided in the memo.
Work can be integral to an employer’s business even if it is performed away from an employer’s premises, at the worker’s home, or on the premises of an employer’s customers. Work can also be integral to an employer’s business even if it is work done by many people.
A business owner has the opportunity to make a profit and experience a potential loss from its business. The memo explains that the worker’s managerial skills will often affect opportunity for profit or loss beyond the current job, such as by leading to additional business from other parties or by reducing the chance for future work. The memo also makes clear that a possible reduction in earnings is not considered a “loss” nor is an increase in pay as a result of good performance or working more hours considered a “profit.” This determination shouldn’t focus on the worker’s ability to work more hours, but instead on the worker’s ability to exercise managerial skills and whether those skills affect the opportunity for profit or loss.
The potential for profit and loss also falls under the nature and extent of relative investment. A worker’s investment is a good indicator of whether he or she is an independent contractor because that worker will also undertake at least some sort of risk.
Does a worker have a special skill or demonstrate business initiative? The memo could be clearer on what “business initiative” actually means, but it does explain that special skills are not necessarily indicative of independent contractor status. Specialized skills can still mean “employee” if those skills are technical and necessary to perform the work. To that end, the technical skills of certain workers like “cable installers, construction workers, and electricians” are not necessarily indicative of any “independence or business initiative.”
Indefiniteness in the worker’s relationship with the employer (ie, at-will status) suggests that the worker is an employee. An independent contractor typically does not work continuously or repeatedly. This is the permanence prong. Lack of permanence, however, does not always amount to independent contractor status. An employer should ask whether the lack of permanence is due to “operational characteristics” of the industry. Do you hire temporary workers or use staffing agencies? Chances are these workers will be considered employees.
Finally, the memo considers the nature and degree of the employer’s control. In the past, this factor was given the most weight in the analysis, but the memo states that no single factor can be determinative. Under this prong, the worker must have control of meaningful aspects of the work performed and actually exercise this control. With changes in technology and the ability to telework, employers should know that their lack of control over employees that work offsite may not be indicative of independent contractor status. If an employer is still exerting control over a worker’s projects or work schedule, it is very likely that that this prong will tip in favor of employee status.