To read this article in Hebrew click here.

The United States Department of Labor (the “DOL”) recently stated that the misclassification of employees as independent contractors is “one of the most serious problems facing affected workers, employers and the entire economy” today, as numerous workers are missing out on minimum wage and overtime payments, as well as workers compensation and unemployment compensation benefits. In addition, as a result of misclassification, federal and state governments lose millions of dollars in taxes to which the DOL claims they are legitimately entitled.

To combat such misclassification, the DOL has entered into partnership agreements with the Internal Revenue Service (the “IRS”) and with 26 individual US state task forces in order to work together to ensure that US employers properly classify their workers as employees. In fiscal year 2014, via these partnership agreements, and in response to the 22,557 claims initiated by individuals who filed complaints that year, the DOL required US employers to pay a total of $240,000,000 in back wages (i.e., minimum wage and overtime pay) to individuals determined by the DOL to be employees, despite having been labeled as independent contractors by their employers.

Declaring that “most workers are employees” under the Fair Labor Standards Act (“FLSA”), and setting forth a detailed “economic realities test,” the DOL issued this past summer a fifteen page memo outlining the factors to be considered when evaluating the manner in which workers should be classified, The main consideration, according to the DOL, is whether the individual worker is economically dependent on the employer, or is independent and in business for him/herself. Such economic dependence is determined based upon an evaluation of the following six factors:

  1. The extent to which the work performed by the worker 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. The relative investments of the worker and the employer
  4. Whether the work performed requires independently exercised skills and initiative
  5. Whether the relationship between the individual and the employer is for a specific time period or is open-ended
  6. The nature and degree of control the employer has over the worker

Click here for a chart setting forth examples of how the above factors apply to every day scenarios.

According to the DOL, an analysis of the above factors will determine whether the worker in question is economically dependent on the employer (and therefore should be classified as an employee) or is operating a business of his/her own (and therefore may be classified as an independent contractor). The DOL emphasizes that no one of the above factors is determinative and that all of the above factors should be analyzed as a whole, in totality.