DOL Says Most Workers are Employees,
Not Independent Contractors
We have been reporting for several years on the United States Department of Labor's (DOL) "Misclassification Initiative", which is aimed at curbing the improper classification of employees as independent contractors. The Connecticut DOL has been pursuing a similar initiative and also has stepped up its enforcement in this area. In furtherance of this initiative, the federal Wage and Hour Division recently published a detailed interpretation letter stating that most workers are employees under the Fair Labor Standards Act (FLSA). See Administrator's Interpretation No. 2015-1.
In this 15-page document, the DOL reviews the application of the "economic realities" test that courts have used to determine whether a worker is an employee or an independent contractor. The DOL concludes that "most workers [classified as independent contractors] are employees under the FLSA's broad definitions." Employers should take heed of the DOL's strong position on this issue and re-examine whether its independent contractors are properly classified.
The FLSA establishes the minimum wage and overtime requirements applicable to most employers. According to the DOL, the term “employee” is broadly defined under the FLSA, and under the “economic realities” test. The DOL states:
“In order to make the determination whether a worker is an employee or an independent contractor under the FLSA, courts use the multi-factorial “economic realities” test, which focuses on whether the worker is economically dependent on the employer or in business for him or herself. A worker who is economically dependent on an employer is suffered or permitted to work by the employer. Thus, applying the economic realities test in view of the expansive definition of “employ” under the Act, most workers are employees under the FLSA.”
The DOL lists a number of factors/questions that must be considered in applying the economic realities test. The factors include:
• Is the work an integral part of the employer’s business? If so, the worker is more likely to be considered an employee.
• Does the worker’s managerial skill affect the worker’s opportunity for profit or loss? It is important not to overlook whether there is an opportunity for loss, as a worker truly in business for him or herself faces the possibility of experiencing a loss.
• How does the worker’s relative investment compare to the employer’s investment? If the worker’s investment is relatively minor, this suggests that the worker may be economically dependent on the employer.
• Does the work performed require special skill and initiative? The DOL emphasizes that specialized skills alone do not indicate that workers are in business for themselves.
• Is the relationship between the worker and the employer permanent or indefinite? A worker’s lack of a permanent or indefinite relationship with an employer is indicative of independent contractor status if it results from the worker’s own independent business initiative.
• What is the nature and degree of the employer’s control? An employer’s lack of control over a worker is not particularly telling if the worker works from home or off-site.
The DOL points out that no single factor is determinative, and that the control factor should not be given undue weight.
The interpretation letter is a clear statement of the DOL’s position on this issue. Further, the risks of misclassification do not only involve minimum wage and overtime issues, but also unemployment insurance, workers’ compensation, income tax, and possibly employee benefit issues. Thus, employers should audit their existing relationships with independent contractors and make any appropriate adjustments.
If you have any questions, please contact any member of the Carmody Torrance Sandak &; Hennessey Labor and Employment Practice Group for more information.