In an Administrator’s Interpretation issued today, Department of Labor Administrator Dr. David Weil stated that “[m]isclassification of employees as independent contractors is found in an increasing number of workplaces in the United States” and that “most workers are employees under the FLSA’s broad definitions.” The 15-page document provides detailed guidance on the DOL’s interpretation of the “economic realities” test used to determine whether an individual is appropriately classified as an independent contractor for purposes of the FLSA. It emphasizes the DOL’s position that “the application of the economic realities factors should be guided by the FLSA’s statutory directive that the scope of the employment relationship is very broad.”
The Administrative Interpretation discusses the factors that the DOL considers under the “economic realities” test for determining whether a worker is an employee or an independent contractor for purposes of the FLSA. The test focuses on whether the worker is economically dependent on the employer or in business for himself or herself. As Dr. Weil explains it in the Administrator’s Interpretation: “In applying the economic realities factors, courts have described independent contractors as those workers with economic independence who are operating a business of their own. On the other hand, workers who are economically dependent on the employer, regardless of skill level, are employees covered by the FLSA.”
The Administrator’s Interpretation states that all of the factors must be considered in each case, and no one factor (and particularly the control factor) will be determinative of whether a worker is an employee. The factors are:
- Is the Work an Integral Part of the Employer’s Business?
The Administrator’s Interpretation explains: “If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer . . . . A true independent contractor’s work, on the other hand, is unlikely to be integral to the employer’s business.”
- Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
The Administrator’s Interpretation explains: “In considering whether a worker has an opportunity for profit or loss, the focus is whether the worker’s managerial skill can affect his or her profit and loss.” It further explains that this factor should not focus merely on the worker’s ability to work more hours, but whether the worker exercises managerial skills and whether those skills affect the worker’s opportunity for both profit and loss.
- How Does the Worker’s Relative Investment Compare to the Employer’s Investment?
This factor looks at the nature and extent of the relative investments of the employer and the worker. The Administrator’s Interpretation states that “[t]he worker should make some investment (and therefore undertake at least some risk for a loss) in order for there to be an indication that he or she is an independent business” an that “[a]n independent contractor typically makes investments that support a business as a business beyond any particular job.” The Administrator’s Interpretation states that the worker’s investment should not be examined in isolation, and that it is the relative investments of the worker and the employer that matters. It also cautions that “investing in tools and equipment is not necessarily a business investment or a capital expenditure that indicates that the worker is an independent contractor.”
- Does the Work Performed Require Special Skill and Initiative?
The Administrator’s Interpretation states: “A worker’s business skills, judgment, and initiative, not his or her technical skills, will aid in determining whether the worker is economically independent.” It cautions, however, that the mere fact that workers are skilled is not itself indicative of independent contractor status, and that even specialized skills do not indicate that workers are in business for themselves, especially if those skills are technical and used to perform the work.
- Is the Relationship between the Worker and the Employer Permanent or Indefinite?
The Administrator’s Interpretation states: “Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee. After all, a worker who is truly in business for him or herself will eschew a permanent or indefinite relationship with an employer and the dependence that comes with such permanence or indefiniteness.”
- What is the Nature and Degree of the Employer’s Control?
The Administrator’s Interpretation emphasizes that the nature and degree of the employer’s control over the worker is not a determinative factor, but instead should be analyzed in light of the ultimate determination whether the worker is economically dependent on the employer or truly an independent businessperson. It states that “the worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business” and that the control must be actual and not merely theoretical. It recognizes that some employers assert that the control that they exercise over workers is due to the nature of their business, regulatory requirements, or the desire to ensure that their customers are satisfied, but states that control exercised for any or all of these reasons still indicates that the worker is an employee.
This Administrator’s Interpretation highlights the DOL’s continuing focus on the issue of misclassification of employees as independent contractors. It also makes clear that the DOL is using a very broad definition of the term “employee” for purposes of determining whether a worker is an employee or an independent contractor.