July 16, 2015
Misclassification of Employees As Independent Contractors - Department of Labor's New Interpretive Guidance
The U.S. Department of Labor, Wage and Hour Division issued a new "Administrator's Interpretation" on July 15, 2015, further explaining how the Division determines whether a worker is an employee or an independent contractor, for purposes of the Fair Labor Standards Act (minimum wage and overtime), the Family and Medical Leave Act, and the Migrant and Seasonal Agricultural Workers Protection Act.
While this guidance specifically applies to determining whether workers are misclassified under those laws, employers should become familiar with the standards under this guidance document, because similar principles are applicable under other labor and employment laws (such as discrimination laws, workers' compensation laws, unemployment compensation laws, and employment tax laws).
The USDOL views misclassification of employees as independent contractors as nearly an epidemic, and it is aggressively seeking instances and pursuing legal actions against offending employers.
Most employers are familiar with the old common law "right to control the work" test as to whether a worker is an employee or an independent contractor. However, the various agencies which enforce employment laws have somewhat varying "tests" for making this determination, and simply looking at "right to control" factors is an oversimplification. Because of the varying tests, it is possible that a worker may be properly classified as an independent contractor for purposes of one law, but not another.
For purposes of the laws administered by the Wage and Hour Division, the "control test" is not "the" test, but rather, the test is whether an employer "suffers or permits [a worker] to work," which is determined by the "economic realities test." The new guidance explains in detail the factors under the "economic realities test," and it elaborates by defining "the" key determination - whether the worker is "economically dependent" on the employer. Therefore, the Wage and Hour Division looks as an "economic dependence test," for lack of a better phrase, in making its determinations.
Under the "economic dependence test," the question is whether the worker is economically dependent upon the employer (and thus its employee), or whether the worker is really "in business for himself" (and thus an independent contractor). This is determined primarily by consideration of six "factors," although no single factor is determinative, and it would be improper to simply "tally up" the factors.
The factors under the "economic dependence test" are: (1) is the work performed an "integral part of the employer's business"; (2) does the worker have an opportunity for profit or loss based upon his managerial skill; (3) what are the relative "investment" of the employer and the worker; (4) does the work require special skills or initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer.
Under these tests, the Wage and Hour Division says, "most workers are employees."
Employers should be aware of this new interpretive guidance and the "economic dependence test," because the general principles under this test can help in making proper determinations under other laws, as well. Employers should be aware that misclassification of workers as independent contractors can have serious, far reaching, and expensive consequences.