United States: Department Of Labor Finds That Most Employees Are Misclassified As Independent Contractors

Last Updated: August 18 2015
Article by Scott T. Silverman

On July 15, 2015, the Wage and Hour Division (WHD) of the Department of Labor declared the misclassification of employees as independent contractors to be "one of the most serious problems" at workplaces in the United States and issued an Administrator's Interpretation that it will utilize to combat this issue. In support, the Department emphasized that problems and complaints involving minimum wage, overtime compensation, unemployment insurance, and workers' compensation have increased significantly in light of the misclassification of workers. ." The focus of the "Administrator's Interpretation" is twofold: (i) addressing relevant definitions and extent of employment relationships covered under the Fair Labor Standards Act (FLSA); and (ii) discussing in detail each factor of the "economic realities" test, which is the test utilized to determine employment status, to provide guidance on whether a worker is an employee or an independent contractor.

First, the Administrator's Interpretation focused on the FLSA's definition of "employ," which "includes to suffer or permit to work." 29 U.S.C. §203(g). The Administrator stressed the broad applicability and importance of the term "suffer or permit" in the analysis of whether a worker is an employee subject to the FLSA's protection. The Administrator briefly discussed the history of "'suffer or permit' standard to reiterate said standard's broad applicability and to support the notion that the standard "broadens the scope of employment relationships covered by the FLSA."

Next, the Administrator addressed the "economic realities" test.. While acknowledging that whether a worker is economically dependent on the employer (hence an employee) or truly in business for him or herself (hence an independent contractor) is the crucial inquiry under the FLSA, the Administrator maintained that the multi-factorial "economic realities" test provides key guidance.

According to the Administrator, the "economic realities" factors, as articulated by various courts over the years, include: 1) the extent to which the work performed is an integral part of the employer's business; 2) the worker's opportunity for profit or loss depending on his or her managerial skill; 3) the extent of the relative investments of the employer and the worker; 4) whether the work performed requires special skills and initiative; 5) the permanency or indefiniteness of the worker-employer relationship; and 6) the degree of control exercised or retained by the employer.

After emphasizing that these six factors must be "examined and analyzed in relation to one another, and [that] no single factor is determinative," the Administrator discussed each factor using case law and examples to aid in answering the economic dependence inquiry. Below are some of the key portions of the Administrator's discussion:

1) Extent to which the work performed is an integral part of the employer's business.

In citing various cases, the Administrator noted that "[i]if 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." Work can be integral to an employer's business even if the work is:

  • "just one component of the business and/or is performed by hundreds or thousands of other workers;" or
  • "performed away from the employer's premises, at the worker's home, or on the premises of the employer's customers."

2) Worker's opportunity for profit or loss depending on his or her managerial skill.

The Administrator discussed that in analyzing this factor, the focus should be on "whether the worker exercises managerial skills and whether those skills affect the worker's opportunity for both profit and loss." The Administrator further maintained that a "worker's ability to work more hours" and "amount of work available" are irrelevant in the workers' managerial skills and in determining whether a worker is an independent contractor.

3) Extent of the relative investments of the employer and the worker.

The Administrator emphasized that a minor investment made by a worker can indicate that the "worker and the employer are not on similar footings and that the worker may be economically dependent on the employer." However, the Administrator also acknowledged that even if a worker makes a substantial investment, it must be compared to the nature and extent of employer's investment to determine whether the worker is truly an independent contractor.

4) Whether the work performed requires special skills and initiative.

The Administrator stressed that a "worker's business skills, judgment, and initiative, not his or her technical skills, will aid in determining whether the worker is economically independent" and hence an independent contractor.

5) Permanency or indefiniteness of the worker-employer relationship.

The Administrator highlighted that while permanency or indefiniteness in a worker-employer relationship suggests that the worker is an employee, the lack thereof does not automatically mean that the worker is an independent contractor. In citing several cases, the Administrator pointed out that the "key is whether the lack of permanence or indefiniteness is due to 'operational characteristics intrinsic to the industry'."

6) Degree of control exercised or retained by the employer.

Finally, the Administrator noted that a worker "must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business" and thus be classified as an independent contractor.

Surprisingly, the Administrator further opined that neither an employer's lack of control over workers nor a worker's control over the hours they work generally indicate an independent contractor status.

This Administrator's Interpretation follows the recently proposed FLSA rule to limit the while collar exemptions. Clearly, the DOL intends to broaden the scope of workers covered by the FLSA. We will continue to keep employers up to date on additional developments in light of the Department's recent proposals and guidance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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