Executive Summary: Today, the Wage and Hour Division of the U.S. Department of Labor (DOL) issued an interpretation in furtherance of its Misclassification Initiative, which concludes that "most workers are employees under the FLSA's broad definitions." See Administrator's Interpretation 2015-1: The Application of the Fair Labor Standards Act's "Suffer or Permit" Standard in the Identification of Employees Who Are Misclassified as Independent Contractors. The Interpretation does not change the "economic realities" test courts currently apply in determining whether a worker is an independent contractor. It does, however, emphasize that each factor of the economic realities test must be applied consistently with the broad definition of "employ" found in the Fair Labor Standards Act (FLSA); that is, whether the worker is economically dependent on the employer and is, therefore, "suffered or permitted to work" by the employer.

Depending on the court, the economic realities test generally includes the following factors:

  1. the extent to which the work performed is an integral part of the employer's business;
  2. the worker's opportunity for profit or loss depending on his or her managerial skill;
  3. the extent of the relative investments of the employer and the worker;
  4. whether the work performed requires special skills and initiative;
  5. the permanency of the relationship; and
  6. the degree of control exercised or retained by the employer.

While the Interpretation did not change the factors most courts consider in determining the economic realities of a work relationship, the Interpretation did provide some important takeaways regarding each factor:

  • The DOL specifically noted that work performed away from the employer's premises, whether in the worker's home or at the employer's customer, can still be integral to the employer's business.
  • If a worker is truly in business for him or herself, and, therefore, an independent contractor, the worker should be at some risk of loss due to the managerial decisions he or she makes. Merely being able to work more hours is not a managerial skill that affects the worker's opportunity for profit or loss.
  • In evaluating the relative investments of the employer and worker, courts should consider whether the worker has made investments in his or her business to further its ability to expand, reduce its cost structure or extend its business plan. Courts should also consider how that investment compares to the employer's investment, not just to the work performed by the worker but to the employer's overall investment in the project.
  • Merely having specialized skills does not mean that the worker is an independent contractor. There is a difference between providing skilled labor and demonstrating the skill and initiative of an independent contractor.  The Interpretation states, in probably its most telling sentence: "Only carpenters, construction workers, electricians, and other workers who operate as independent businesses, as opposed to being economically dependent on their employer, are independent contractors."
  • Courts should also consider whether the lack of permanence or indefiniteness in the worker's relationship with the employer is the result of operational characteristics of the business (i.e., whether the work is typically transient or seasonal) or the result of the worker's own independent business initiative.  
  • Control exerted due to the nature of the business, regulatory requirements and/or customer satisfaction are indicative of an employee/employer relationship. The issue is how much control is exercised by the employer, not why the employer is exerting it.

While no single factor is determinative, the DOL emphasized that the "control factor" should not be given undue weight. Ultimately, according to the DOL, the "factors should be considered in totality to determine whether a worker is economically dependent on the employer, and thus an employee." If the worker is in business for him or herself, and not economically dependent on the employer, then he or she is an independent contractor.

Employers' Bottom Line

Employers, particularly those who regularly use independent contractors, should re-evaluate the status of their workers in light of this Interpretation. Employers must look at their independent contractors and ask whether, considering the economic realities test, these workers are truly in business for themselves or are they economically dependent on the employer's business? Given the DOL's sweeping statement that "most workers are employees under the FLSA's broad definition," the economic reality for many employers may be that their independent contractors will now be considered their employees.