During its two terms, the Obama Administration declared war on misclassification of employees as independent contractors. The U.S. Department of Labor (DOL) issued additional guidance on the proper classification of workers. The guidance made clear that the DOL, under the Obama Administration, would view most workers as employees. During this period, investigators were hired and trained to detect and deter misclassification. In addition, the DOL entered into partnerships with 37 states to work together to combat misclassification.
Companies that supplement workforces with independent contractors should not view the change in Washington as an invitation to misclassify workers. Employers should expect DOL enforcement to continue. If federal government enforcement efforts are given a lower priority by a DOL under the Trump Administration, then employers should expect state departments of labor to fill the void under their joint enforcement initiatives. Employers should also anticipate that plaintiffs’ class action lawyers will continue to target misclassification.
Employers who are determined to have misclassified employees as independent contractors may be liable for:
- Unpaid minimum wage
- Unpaid overtime compensation
- Health and other benefits
- Denied medical leave
- State and federal taxes
- Unemployment insurance and claims
- Workers' compensation insurance and claims
To date, the DOL guidance issued during the Obama Administration remains in effect. To properly classify workers, employers should “determine whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor).”
The DOL directs employers to focus on the broad definition of “employ” under the Fair Labor Standards Act (FLSA) and the “economic realities” test developed by the courts. The DOL instructs that the application of the factors “should be guided by the overarching principle that the FLSA should be liberally construed to provide broad coverage for workers.” The guidance summarizes the factors of the economic realities test as:
- The extent to which the worker’s services are an integral part of the employer’s business. If the worker performs the primary type of work that the employer performs for its customers, then the factor weighs in favor of an employee relationship. If the worker provides a service to the employer's business, then the factor weighs in favor of an independent contractor relationship.
- The worker’s opportunities for profit and loss depending on his or her managerial skill. The worker who is paid by the hour with no risk of loss is more likely an employee than the worker who may suffer a loss of capital investment based on the manner in which he or she managed the project.
- The extent of relative investment of the employer and the worker. The worker who performs services only for one company and uses company equipment is more likely an employee than a worker who has formed an LLC, uses his or her own equipment and supplies, and performs services for a number of customers. It is important to note that the DOL takes the position that simply providing tools does not create an independent contractor relationship if the worker’s investment is small when compared to the investment of the employer.
- Whether the work performed requires special skills and initiative. The worker who provides only specialized skill is more likely an employee, while the worker who provides specialized skill, offers services to a number of customers, markets his or her services, and makes decisions about materials is more likely an independent contractor.
- The permanency of the relationship. A longer work history weighs in favor of an employee relationship. A discrete project-based engagement weighs in favor of an independent contractor relationship.
- The degree of control exercised or retained by the employer. The worker who is subject to the company handbook, conduct rules, and specific direction for completing a project is likely an employee, while the worker who is tasked with a project and a deadline only is more likely an independent contractor.
DOL cautions throughout the guidance that this control factor should not be given “an oversized role in the analysis.” On its website, the DOL characterizes misclassification as “one of the most serious problems facing affected workers, employers and the entire economy.” The change in leadership in Washington will not impact an employer’s need to comply. Government investigators and plaintiffs' attorneys are focused on the issue. Employers should focus on and review their worker classifications as well.