On July 15, 2015, the U.S. Department of Labor issued an Administrator’s Interpretation regarding the application of the Fair Labor Standards Act with respect to the increasing misclassification of workers as “independent contractors.” The DOL’s recent interpretation narrows the classification of independent contractors to very limited and specific situations and thus, more workers may now be deemed “employees” and qualify for overtime under the FLSA.
Under the DOL’s new interpretation, a worker’s classification no longer depends almost exclusively on the employer’s exertion of control over the worker, but rather, on whether the worker is “economically dependent” on the employer. Also known as the “economic realities” test, which is already used by most federal courts, the DOL’s new approach for determining whether a worker is an “employee” or “independent contractor,” requires examination of the following factors:
- 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; and
- The degree of control exercised or retained by the employer.
In undertaking the foregoing analysis, the DOL notes, “each factor is examined and analyzed in relation to one another, and no single factor is determinative” and “the ‘control’ factor … should not be given undue weight.”
With the subjective nature of the “economic realities” test and the DOL’s explicitly stated opinion that “most workers are employees” under the FLSA, the DOL will most likely continue its aggressive examination of worker classification throughout the country. And, while this Administrator’s Interpretation is not binding and does not carry the force of law, courts throughout the country will most certainly give deference to the DOL’s Interpretation. Thus, employers who have independent contractors should re-evaluate such designations to ensure they correspond with the factors identified above. Additional, important takeaways from the DOL’s recent interpretation of “independent contractors” include:
- Use independent contractors sparingly, as any such designation will be highly scrutinized by the DOL;
- Review the type and scope of the work needed by the worker, as any worker performing duties that are an integral component of the business will likely be deemed to be an employee;
- Evaluate the investment the worker makes to do the work needed relative to the employer’s investment in the work. The more an employer invests in the tools and equipment for the worker (relative to what the worker invests) the more likely the worker is to be deemed an employee;
- Be careful about the longevity of the relationship between the employer and the worker. The longer the relationship exist the more likely the worker will be considered an employee;
- If regularly classifying workers as “independent contractors” is necessary, set up and maintain procedures and policies for determining how such classifications are made and keep records of all “independent contractor” designations and the facts considered in making the designation;
- Workers who are classified as “independent contractors” should not have a company e-mail address, be given access to the company server, attend functions specifically for employees or have the functions, responsibilities or duties normally assigned to employees; and
- Employers should continuously monitor existing independent contractors to ensure they have not acquired additional responsibilities or otherwise changed the type and scope of work that would convert them to “employee” status.
In the end, and in light of the DOL’s Administrator’s Interpretation, employers who engage independent contractors should evaluate whether the contractors are truly in business for themselves or whether they are economically dependent on the employer’s business. Given the DOL’s broad statement that “most workers are employees,” the reality is, going forward, most independent contractors will be considered employees for purposes of the FLSA, at least according to the DOL.