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Further Crackdown on Independent Contractors

On July 15, 2015, the Dept. of Labor’s (DOL) Wage and Hour Division (WHD) issued Administrator’s Interpretation 2015-1, The Application of the Fair Labor Standards Act’s “Suffer or Permit” Standard in the Identification of Employees Who Are Misclassified as Independent Contractors (the “WHD Interpretation”), which analyzes how the Fair Labor Standards Act’s (FLSA) definition of “employ” affects classification of workers as independent contractors.  The WHD Interpretation also provides guidance on application of the “economic realities” test used by courts to determine if an independent contractor should instead be classified as an employee.

It is clear from the WHD Interpretation that independent contractor misclassification continues to be a top priority.

The DOL provides the following broad guidelines for independent contractor classification:

  • The FLSA’s definition of “employ” as “to suffer or permit to work” and the economic realities test provide a broader scope of employment than the common law control test. The economic realities test:
    • should be applied in view of the “suffer or permit” standard; and
    • focuses on factors that act as a guide to determine if the worker is economically dependent on the employer or is truly in business for himself.
  • Application of the economic realities test must be guided by the broad scope of the employment relationship under the FLSA, which results in most workers being employees under the law.
  • The actual economic realities of the relationship between the employer and worker are determinative of whether the individual is an employee or independent contractor. The following factors are not relevant to that analysis:
    • how the employer labels the worker, including as an independent contractor, owner, partner or member of a limited liability company;
    • agreements identifying a worker by a particular work classification; and
    • the worker’s receipt of a Form 1099-MISC.

The majority of the WHD Interpretation is devoted to the DOL’s analysis of the six factors of the economic realities test. The DOL emphasized that all six factors must be considered and none is dispositive of a worker’s employee status. In particular, the DOL explained that the “control” factor should not be given “undue weight.” In addition, consideration of the factors should not be a mechanical, quantitative analysis. The DOL discusses each of the six factors, including the following analysis and examples:

  • Whether the work performed is an integral part of the employer’s business. If the work performed by the worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer. Work can be integral to a business even if the work is just one component of the business, is performed by hundreds of other workers (such as in a call center) or is performed away from the employer’s premises.
  • Whether the worker’s opportunity for profit or loss is affected by his managerial skills. The worker’s decisions to hire others, purchase materials and equipment, advertise, rent space and manage time tables may reflect managerial skills that will affect his opportunity for profit or loss. The worker’s ability to do his job well, his ability to work more hours and the amount of work available from the employer do not.
  • The extent of the worker’s investments relative to those of the employer. Even if it is substantial, the worker’s investment should not be considered alone, but by comparing it to the employer’s investment. If the worker’s investment is relatively minor, that suggests the worker may be economically dependent on the employer.
  • Whether the work performed requires special skills and initiative. This factor involves the worker’s business skills, judgment and initiative, not his technical skills.
  • The level of permanence in the relationship. Permanency or indefiniteness in the working relationship suggests that the worker is an employee, but lack of permanence is not dispositive.
  • The degree of control the employer exercises or retains over the worker. To be properly classified as an independent contractor, the worker must control meaningful aspects of the work. Workers that work from home are not necessarily independent contractors simply because the employer does not control the work environment or because the workers are subject to little direct supervision. Similarly, a worker’s control over the hours he works is not indicative of independent contractor status. As with the other five factors, the control factor should not be given undue weight.

Practical Implications

The DOL’s guidance in the WHD Interpretation:

  • Underscores the fact that independent contractor misclassification continues to be a top priority for the DOL.
  • Suggests the DOL favors less emphasis on:
    • an employer’s “control” over the worker and greater focus on the worker’s economic independence; and
    • written agreements labeling a work relationship with a particular classification status. The DOL takes the position that the labels are not relevant to the analysis and the focus should be the actual economic reality of the working relationship.

Written agreements establishing the independent contractor relationship remain good practice, but companies should ensure that the working relationship in actual practice satisfies the six factors of the economic realities test.

Companies should regularly review their independent contractor relationships for compliance, with the understanding that employee status is construed broadly by the DOL. Exceptions from the FLSA’s minimum wage and overtime pay protections are construed narrowly in favor of employees and independent contractor misclassification is a top enforcement priority of the DOL and several state and local agencies.

Please contact us to discuss this WHD Interpretation and make sure that your use of independent contractors complies with applicable law.

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