United States: US Department of Labor Issues Administrator's Interpretation Aimed At Limiting Independent Contractor Classification

As forecast in our June 12, 2015 blog post David Weil, Administrator of the Department of Labor's Wage and Hour Division (WHD) has released Administrator's Interpretation (AI) No. 2015-1, entitled "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 AI provides the Department of Labor's (DOL) guidance for determining whether a worker is properly classified as an independent contractor under the Fair Labor Standards Act (FLSA), the primary federal law governing minimum wages and overtime pay, as well as other statutes like the Family and Medical Leave Act (FMLA) that adopt the FLSA's definition of "employee." This guidance represents a continuation of DOL's efforts to "crack down" on perceived misclassification of employees as independent contractors. The new guidance does not purport to change DOL policy but rather "provides additional guidance regarding the application of the standards for determining who is an employee" under the FLSA, which "may be helpful to the regulated community in classifying workers and ultimately in curtailing misclassification."

As detailed below, the AI is an effort to tilt the FLSA's economic realities test further in favor of finding employee status. Indeed, the AI emphasizes how "broad" the definition of employee is under the FLSA, concluding that "most workers are employees under the FLSA's broad definitions." Its interpretation of the economic realities test clearly aims to make this observation a reality. In particular, the AI appears to emphasize the importance of the "integral to the business" prong of the test, suggesting that work that is integral to the putative employer's business can only be performed by employees. It also identifies as correct employee-friendly interpretations of the factors in the test, while criticizing those interpretations that make independent contractor findings less onerous.

Weight Attributed to Administrative Interpretations

DOL's practice of issuing "administrative interpretations" began in March 2010, with the issuance of Administrator's Interpretation No. 2010-1 ("AI 2010-1"). In that document, DOL concluded that employees who perform the "typical" duties of a mortgage loan officer employee do not satisfy the duties requirements of the FLSA's administrative exemption. AI 2010-1 was significant not only because it withdrew a 2006 opinion letter that reached the opposite conclusion, but also because it established a new procedure for DOL to provide broad interpretive guidance. Prior to 2010, DOL issued guidance in the form of rules and opinion letters limited to the specific facts presented to it in each request.

DOL recently survived a challenge to its use of Administrator's Interpretations in Perez v. Mortgage Bankers Assoc., No. 13-1041 (U.S. 2015). In Perez the United States Supreme Court addressed whether AI 2010-1 was procedurally invalid because it was issued without using the notice-and-comment process set forth in the Administrative Procedure Act (APA). The Court held that agencies are only required to follow notice-and-comment procedures for legislative rules (rules that amend or otherwise modify statutes and/or rules) and not interpretive rules (rules that constitute an agency's construction and/or interpretation of a statute and/or rule). Where agencies issue interpretive rules, notice-and-comment rulemaking is not required, but those rules do not carry the "force and effect of law." In addition, the Court stated that the level of deference afforded to an agency's interpretive rule depends on that agency's consistent, or inconsistent, historical interpretation of the same regulation. (For more on the Perez decision, see our blog post.)

The AI on independent contractor classification likely constitutes an interpretative rule, meaning that the guidelines are not binding on the regulated community.

Employment Status Under The FLSA

The AI goes to great lengths to emphasize that the term "employee" is broadly defined under the FLSA and therefore genuine independent contractor status should be the exception, not the rule. To emphasize this point, the AI utilizes some iteration of the term "broad" at least 18 times throughout its 15 pages in describing the scope of the definition of the FLSA's "employee."

The AI's main goal is to provide DOL's view on how courts should interpret the "economic realities" test utilized to determine whether a worker is an employee for purposes of the FLSA. The test seeks to determine the degree of economic dependence of the worker on the putative employer. If the worker is economically dependent on the putative employer, the worker under the test should be found to be an employee. The test includes six factors aimed at helping courts make this determination. The six factors typically associated with this test are:

  1. the nature and degree of the alleged employer's control as to the manner in which the work is to be performed;
  2. the alleged employee's opportunity for profit or loss depending upon his managerial skill;
  3. the alleged employee's investment in equipment or materials required for his task, or his employment of workers;
  4. whether the service rendered requires a special skill;
  5. the degree of permanency and duration of the working relationship; and
  6. the extent to which the service rendered is an integral part of the alleged employer's business.

Sec'y of Labor v. Lauritzen, 835 F.2d 1529, 1534-35 (7th Cir. 1987).

The AI states that the application of the economic realities test factors should be guided by the FLSA's definition of the term "employ" which means to "suffer or permit to work," 29 U.S.C. § 203(g). Administrator Weil in the AI contends that this standard was specifically designed to ensure as broad of a scope of statutory coverage as possible.

The main feature of the AI is its examination of each factor in the economic realities test, identifying court decisions regarding each factor with which DOL agrees, as well as those it believes misapplied the analysis. In so doing, the AI essentially gives its stamp of approval to the analyses most likely to result in a finding of employment status, aiming to alter many common approaches to the test to tip the scales further in favor of employee status.

For example, the AI appears to emphasize the importance of the "integral to the business" prong of the test – even though that element does not appear in some formulations of the economic realities test. The AI states that this factor "should always be analyzed in misclassification cases," contending that "[i]f the work performed by a worker is integral to the employer's business, it is more likely that the worker is economically dependent on the employer." By analyzing this factor first, and noting that courts have found it to be "compelling" in finding employee status, the AI signals that companies that rely on independent contractors to perform work that is part of their business are in DOL's cross-hairs.

At the same time, the AI deemphasizes the "control" element of the analysis. As most companies know, control exerted by the putative employer over the worker is often considered the most critical factor in determining if an employer/employee relationship exists. Courts usually ask, among other things, whether the putative employer is the one to set the worker's hours, ensure quality control, or set the rate of pay. If so, an employer/employee relationship is usually considered to exist. Administrator Weil, however, takes issue with placing too much emphasis on control in the economic realities test, stating that "the nature and degree of the employer's control must be examined as part of determining the ultimate question whether the worker is economically dependent on the employer." To emphasize his point, even though the control factor is typically listed first in recitations of the economic realities test, the AI addresses it last.

Even so, the AI does provide DOL's view on how courts should analyze the control prong of the test. Most significantly, the AI addresses the argument made by employers in heavily regulated industries that certain controls exercised over workers due to statutory regulatory requirements should not be considered to be "control" exerted over workers for purposes of the misclassification analysis. The AI rejects this argument, stating essentially that control is control, whether it is the result of government regulations or not.

Similarly, the AI alters the "worker's investment" prong of the analysis. Many courts examine whether the worker has invested significant sums into his or her business. The AI, however, posits that the worker's investment "must be significant in nature and magnitude relative to the employer's investment in its overall business to indicate that the worker is an independent businessperson."This comparative analysis is not evident from the factor as typically articulated, which examines "the alleged employee's investment in equipment or materials required for his task, or his employment of workers." Even so, the AI states that "[a]n analysis of the workers' investment, even if that investment is substantial, without comparing it to the employer's investment is not faithful to the ultimate determination of whether the worker is truly an independent business." In articulating this view, the AI specifically takes issue with decisions from the Fourth and Eleventh Circuits.

Impact

Companies that utilize independent contractors should re-examine their independent contractor relationships in light of the AI to assess whether they are likely to withstand scrutiny under the DOL's new interpretation of the economic realities test.

Of course, these guidelines only address independent contractor classification under the FLSA's test. Companies that utilize independent contractors need to be aware that different tests applicable under other statutes and regulations, both state and federal, remain in effect.

US Department of Labor Issues Administrator's Interpretation Aimed At Limiting Independent Contractor Classification

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