DOL Says Most Workers Are Employees
On July 15, 2015, U.S. Department of Labor Administrator David Weil issued an Administrator’s Interpretation addressing the misclassification of workers as independent contractors instead of employees. The Administrator’s Interpretation provides guidance on the application of the rules for determining who is an employee under the Fair Labor Standards Act (FLSA), emphasizing the FLSA’s expansive scope and concluding that most workers are employees under the Act’s broad definitions. The guidance is also applicable for determining whether a worker is an employee in cases arising under the Migrant and Seasonal Agricultural Worker Protection Act (MSPA) and the Family and Medical Leave Act (FMLA).
The DOL has expressed concern about misclassification depriving workers of important workplace protections such as minimum wages, overtime, unemployment insurance, and worker’s compensation, as well as other benefits such as FMLA leave. The agency has also pointed out that misclassification results in lower tax revenues for government and an uneven playing field for employers that properly classify their workers.
The Administrator’s Interpretation begins with the FLSA’s broad definition of “employ” as “to suffer or permit to work.” The DOL explains that the “suffer or permit” concept has wide applicability and is critical to determining whether a worker is an employee and thus entitled to the FLSA’s protections. According to the DOL, an entity suffers or permits an individual to work if the individual is dependent on the entity as a matter of economic reality.
The DOL states that the multi factor “economic realities” test developed by courts should be applied with a view toward the FLSA’s broad scope of employment and the “suffer or permit” standard to determine whether a worker is an employee or independent contractor.
6-Factor Economic Realities Test
To illustrate how the economic realities factors should be applied, the Administrator’s Interpretation reviews each of the six factors under the test, providing explanatory guidance, examples, and citations to case law.
(1) Is the work an integral part of the employers business? The DOL explains that if the work performed is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer. A worker can be an integral part of the business even if the work is just one component of the business or is performed by hundreds or thousands of workers. Work can be integral even if it is performed away from the employer’s premises, at a worker’s home, or on the premises of the employer’s customers.
(2) Does the workers managerial skill affect her opportunity for profit or loss? The DOL explains that a worker in business for herself faces the possibility of not only making a profit but also experiencing a loss. A worker’s managerial skill often affects her opportunity for profit or loss beyond the current job by leading to additional business from other companies or by reducing the opportunity for future work. According to the DOL, a worker’s ability to work more hours and the amount of work available from the employer have nothing to do with the worker’s managerial skill, and those factors do little to separate employees from independent contractors, both of whom are likely to earn more if they work more and if there is more work available.
(3) How does the worker’s relative investment compare to the employer’s investment? This inquiry focuses on the nature and extent of the relative investments of the employer and the worker in determining whether the worker is an independent contractor in business for himself. From the DOL’s perspective, an independent contractor typically makes investments that support a business beyond any particular job. The DOL also emphasizes that a worker’s investment shouldn’t be considered in isolation but rather should be compared to the employer’s investment. To indicate independent contractor status, the investment by a worker must be significant in nature and magnitude relative to the employer’s investment in the overall business.
(4) Does the work performed require special skill and initiative? The worker’s business skills, judgment, and initiative, rather than her technical skills, are relevant to the determination of whether she is economically independent. Even specialized technical skills don’t necessarily indicate that a worker is in business for herself.
(5) Is the relationship between the worker and the employer permanent or indefinite? The DOL weighs permanency and indefiniteness in favor of suggesting that the worker is an employee. The DOL notes that most workers are engaged on a permanent or indefinite basis (e.g., the typical at-will employee). That contrasts with an independent contractor, who is more likely to be working one project for one employer and doesn’t necessarily work continuously or repeatedly for the same employer. Nevertheless, the DOL cautions that a lack of permanence or indefiniteness doesn’t automatically suggest an independent contractor relationship.
The Lack of permanence in the relationship should be reviewed to determine if it is indicative of the fact that the worker is running an independent business. The key is whether the lack of permanence or indefiniteness is due to “operational characteristics intrinsic to the industry” (e.g., most companies in the industry hire part-time workers or use staffing agencies) or the worker’s “own business initiative.” For example, the transient nature of the nursing workforce has more to do with the nature of their profession than their success in marketing their skills independently.
(6) What is the nature and degree of the employer’s control? A worker’s control over meaningful aspects of the work performed to the extent that it’s possible to view him as a person running his own business weighs in favor of independent contractor status. The DOL states that an employer’s lack of control over workers isn’t particularly telling in terms of independent contractor status if the workers work from home or off-site. The nature and degree of the employer’s control must be examined to determine whether the worker is economically dependent on the employer. The DOL also reiterates that control shouldn’t play an oversize role in the analysis and that all factors must be considered.
In closing, the DOL offers a reminder that the FLSA’s expansive coverage must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor. The DOL cautions that the factors shouldn’t be analyzed mechanically or in a vacuum, and no single factor should be overemphasized. Administrator’s Interpretation NO. 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.
This interpretive memo signals an area of focus for the DOL’s enforcement actions in the coming year. The DOL’s guidance is not the law and courts are not required to defer to the agency’s interpretations, but the Administrator’s Interpretation nevertheless is likely to be used by attorneys who represent employees as another weapon in wage and hour class and collective actions. You should take the opportunity to review your relationships with independent contractors to ensure proper classification.
This article, slightly modified to note recent updates, was featured in the September 2015 issue of the Wisconsin Employment Law Letter, which is edited by Axley Brynelson Attorney Saul Glazer and published by BLR®—Business & Legal Resources. Reproduced here with the permission of BLR®—Business & Legal Resources.