New Guidance: DOL Asserts Most Independent Contractors Are Employees

Contending that employers may intentionally misclassify workers as independent contractors to cut costs and avoid compliance with labor laws, U.S. Department of Labor (DOL) Wage and Hour Administrator David Weil issued a new “Administrator’s Interpretation” on July 15, 2015. In it, he asserts that most workers are “employees” under the Fair Labor Standards Act (FLSA) based on the statute’s broad definition of employment and the “suffer or permit to work” standards in the FLSA.

According to DOL, whether a worker is an employee or an independent contractor under the FLSA depends on whether the worker is “economically dependent” on the employer or in business for himself. If the worker is economically dependent on the employer, he is “suffered or permitted to work” and, therefore, an employee under the FLSA. The administrator defines this test broadly and generally asserts that it captures most workers currently classified by employers as independent contractors.

Courts, on the other hand, typically rely on a multifactor “economic realities” test to determine whether a worker is an employee or an independent contractor. Generally, these factors include the following:

1. The extent to which the work performed is integral to 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
6. The degree of control exercised or retained by the employer

Under the “economic realities” test, no single factor – including the “control” factor – is determinative, and the factors together are merely a tool to help determine the correct classification. In the new Administrator’s Interpretation, DOL analyzes and provides examples for each of the six test factors. Importantly, however, DOL contends that these factors must be analyzed against what it asserts is the much broader definition of employee found in the FLSA.

DOL emphasizes that, in its view, how an employer may “label” a worker is not determinative. According to DOL, whether the employer labels the worker an “employee,” “partner,” “member” or “independent contractor” does not contribute to the analysis of whether the worker is properly classified under the FLSA. Contrary to many court decisions, DOL also dismisses as irrelevant (a) the worker’s receipt of a Form 1099-MISC, and (b) a written agreement between the employer and worker designating the worker as an independent contractor.

The new Administrator’s Interpretation is not limited to the FLSA. Rather, Administrator Weil expressly states that these same expansive standards apply in determining whether a worker is an employee or independent contractor under the federal Family and Medical Leave Act (FMLA). Accordingly, DOL’s renewed emphasis on alleged worker misclassification likely will extend beyond the wage and hour context.

Although the administrator’s pronouncement is not legally binding, courts generally defer to such interpretations when applying the underlying law, here the FLSA. At the very least, the Administrator’s Interpretation provides insight regarding DOL’s enforcement efforts as they relate to worker classification issues. Given DOL’s ongoing Misclassification Initiative and its recent announcement concerning a proposed increase to the overtime threshold for exempt employees, this new Administrator’s Interpretation signals:

• a heightened focus on the part of DOL to curtail the ability of employers to provide services and goods through independent contractor relationships, and
• the likelihood of an increased enforcement initiative concerning employee misclassification and unpaid overtime.

To view a copy of the July 15, 2015, Administrator’s Interpretation, click here.

For further guidance on issues related to classifying workers as employees or independent contractors (including workplace audits), or FLSA compliance generally, please contact the authors or any other member of the firm’s labor and employment group.