On July 15, 2015, the U.S. Department of Labor released new guidance regarding the classification of workers as either independent contractors or employees under the Fair Labor Standards Act (FLSA). Here’s what employers need to know about the new guidance:
The DOL’s new guidance explains that whether an individual is an employee or an independent contractor under the FLSA is based on a multi-factor “economic realities” test. The DOL emphasizes that this standard is different from the common law “control” test utilized by most states.
The guidance explains that the “economic realities” test must be applied in view of the FLSA’s broad “suffer or permit” standard for determining compensable work. Under this standard, an individual is considered to be employed and subject to the FLSA if the employer “suffers or permits” him or her to work. The DOL argues that because this standard is broad, “most workers are employees under the FLSA.”
The guidance identifies six factors that are relevant to determining whether an individual is an employee under the economic realities test. These factors include the following:
- Is the work an integral part of the employer’s business?
- Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
- How does the worker’s relative investment compare to the employer’s investment?
- Does the work perform require special skill and initiative?
- Is the relationship between the worker and the employer permanent or indefinite?
- What is the nature and degree of the employer’s control?
According to the DOL, these six factors should not be analyzed mechanically or in a vacuum, and no single factor, including control, should be overemphasized.
Takeaway: Misclassification of employees as independent contractors carries potential risks and liabilities, including minimum wage, overtime, taxes, unemployment benefits, and workers’ compensation. Companies that utilize independent contractors should monitor ongoing legal developments in this area and ensure that they are in compliance.