The Department of Labor Narrows The Independent Contractor Exemption Classification

A recent DOL Interpretation will probably entitle more workers to benefits and overtime compensation as employees. David Weil, the Administrator of the Wage and Hour Division of the U.S. Department of Labor (DOL) issued an Interpretation last week regarding the proper analysis to be used in determining whether a worker is an independent contractor or an employee. See 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 Interpretation does not significantly change the “economic realities” test that most courts utilize in determining whether a worker is an employee or an independent contractor. However, the Interpretation does emphasize that the economic realities test must be applied in a manner consistent with the broad definition of “employ” found in the Fair Labor Standards Act (FLSA); that is, whether the worker is economically dependent on the employer and is, therefore, “suffered or permitted to work” by the employer.

The economic realities test generally includes the following factors:

  1. the extent to which the work performed is an integral part of the employer’s business;
  2. the degree of control exercised or retained by the employer;
  3. the extent of the relative investments of the employer and the worker;
  4. the permanency of the relationship;
  5. whether the work performed requires special skills and initiative; and
  6. the worker’s opportunity for profit or loss depending on his or her managerial skill.

According to the DOL, “The factors should not be applied as a checklist, but rather the outcome must be determined by a qualitative rather than quantitative analysis.”  As you can see, the test has few bright line standards and contains significant room for subjective interpretation. The DOL did provide some important guidance regarding the application of each factor, noting that:

  • Work can still be integral to the employer’s business even when it is performed away from the employer’s premises.
  • If a worker is actually an independent contractor and in business for herself, she should be at some risk of loss due to her business decisions.
  • Courts should consider whether the worker has made investments in her business for strategic reasons such as to further its ability to expand, reduce costs or extend its business plan. Courts should also consider how that investment compares to the employer’s investment, not just to the work performed by the worker but to the employer’s overall investment in the project.
  • A worker is not an independent contractor merely because she possesses specialized skills.  “Only carpenters, construction workers, electricians, and other workers who operate as independent businesses, as opposed to being economically dependent on their employer, are independent contractors.”
  • Is the lack of permanence or indefiniteness in the worker’s relationship with the employer the result of operational characteristics of the business or the worker’s own independent business initiative?

No single factor is determinative, and the DOL emphasized that the “control factor” should not be given undue weight. Ultimately, the “factors should be considered in totality to determine whether a worker is economically dependent on the employer, and thus an employee.” If the worker is in business for him or herself, and not economically dependent on the employer, then he or she is an independent contractor.

To-Do’s for Employers

All employers should evaluate their independent contractor relationships in light of the Interpretation to ensure that their workers are properly classified.   Considering the DOL’s position that “most workers are employees under the FLSA’s broad definition,” employers should resist the urge to classify a worker as an independent contractor when she is actually probably an employee.

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