HR Legalist

Misclassification in the Cross-Hairs: DOL Issues new Interpretive Guidance

The U.S. Department of Labor has been busy of late. Fresh off of issuing a new Notice of Proposed Rulemaking proposing major changes to overtime exemptions (as summarized by HRLegalist), DOL Administrator David Weil has issued a new Administrator’s Interpretation addressing the misclassification of employees as independent contractors. The Interpretation does not change the law, but refers to existing regulations and cases. The message of the Interpretation can be summarized as follows: the definition of “employee” under the Fair Labor Standards Act (“FLSA”) is very broad, and employers who misclassify employees as independent contractors could find themselves facing enforcement actions from the DOL’s Wage and Hour Division. Here are some of the key points:

“Suffer or Permit” to Work

The FLSA defines “employ” broadly as “to suffer or permit to work.” The Supreme Court has deemed this standard to be broader than the common-law control test, which focuses on the employer’s degree of control over the worker.   In support of an expansive standard, the Interpretation observes that before the FLSA was passed in 1938, the phrase “suffer or permit” could be found in state laws designed to prevent employers from getting around child labor laws.

The “Economic Realities” Test and Factors

The Interpretation breaks down the main factors used by courts to determine whether a worker is an employee subject to the FLSA or an independent contractor not subject to wage and overtime rules. The Interpretation repeatedly cautions that the factors are only a guide, and that the true test is whether or not the worker is economically dependent on the employer (an employee) or in business for him or herself (an independent contractor). Some courts describe the factors slightly differently, and no one factor is determinative.

1. Is the Work an Integral Part of the Employer’s Business? If the work being done is essential to the employer’s business, it is more likely that the worker will be economically dependent on the employer. Work can be integral even if the task is done off-site, and even if the work is shared by hundreds or thousands of other workers.
2. Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss? A worker who is truly in business for him or herself must rely on managerial skill and good decision making, not just technical ability, to succeed. If a worker’s bottom line is affected by her ability to make decisions about hiring others, purchasing materials and equipment, and marketing and advertising, it is more likely that she will be considered an independent contractor.   Workers who face the possibility of sustaining a loss are also more likely to be considered independent.
3. How Does the Worker’s Relative Investment Compare to the Employer’s Investment? A worker who invests significant resources on items such as tools and equipment, thus increasing his risk of loss, is more likely to be an independent contractor. The Interpretation cautions that even workers who invest thousands of dollars for equipment used at work will still be considered employees if their investment pales in comparison to the employer’s investment in their overall business.
4. Does the Work Performed Require Special Skill and Initiative? The Interpretation cites this factor but then immediately downplays it, contending that technical skill alone does not support independent contractor status. Business initiative, however, can support contractor status.
5. Is the Relationship between the Worker and the Employer Permanent or Indefinite? Workers who are engaged on a permanent or indefinite basis (i.e. workers who continue until they quit or are terminated) are more likely to be considered employees. However, workers who only work for a set period of time because of the nature of their industry (i.e. seasonal workers) can still be considered employees. The key is whether or not the relationship between the worker and the employer is impermanent because the worker is truly operating independently.
6. What is the Nature and Degree of the Employer’s Control? The Interpretation downplays this factor as well, citing a recent case stating that control is only significant “when it shows an individual exerts such a control over a meaningful part of the business that she stands as a separate economic entity.” The Interpretation also cautions that employees are not more likely to be independent contractors simply because they have the ability to control their hours and work independently thanks to modern telecommuting and work-from-home options.

Conclusion

The Interpretation concludes with a statement that “most workers are employees under the FLSA’s broad definitions.”   While that may be overly broad, this Interpretation is yet another signal that the DOL is targeting employee misclassification, with the aim of placing as many workers as possible under the umbrella of the FLSA. With changes to the white-collar exemptions also anticipated, the Wage & Hour Division could soon be working overtime on enforcement actions. That means that now is a good time for employers and their counsel to make sure they are classifying all workers correctly.