On Wednesday, July 15, the U.S. Department of Labor (DOL) issued an interpretative guidance memo aimed at addressing the misclassification of employees as independent contractors. The DOL's position is that most workers qualify as employees under the Fair Labor Standards Act (FLSA) and its broad definition of "employ."
Perceived employee misclassification has become a hot topic in recent years as the economy has changed and growing businesses turn increasingly to enlist the help of contract workers. In fact, since announcing its Misclassification Initiative in September 2011, the DOL continues to make employer compliance with the FLSA a top priority. The number of FLSA cases filed in federal courts has significantly increased as a likely result of the DOL activity. Misclassification issues present fertile ground for DOL investigations, individual complaints and class action litigation.
In a 15-page interpretation memo, David Weil, the Wage and Hour Division Administrator for the DOL, highlights the FLSA's broad definition of "employ." The term "employ" is defined in the FLSA, in part, as to "suffer or permit to work." Applying the FLSA's definition, Weil stresses that workers who are economically dependent on the business of the employer, regardless of skill level, are considered employees. On the other hand, independent contractors are workers with economic independence who are in business for themselves. The "suffer or permit" standard is intended to offer the broadest definition of employment under the law because it covers work that the employer directs or allows to take place.
The Administrator focused on the "economic reality" factors developed by the courts which include:
- the extent to which the work performed is an integral part of the employer's business;
- the worker's opportunity for profit or loss depending on his or her managerial skill;
- the extent of the relative investments of the employer and the worker;
- whether the work performed requires special skills and initiative;
- the permanency of the relationship; and
- the degree of control exercised or retained by the employer.
The Administrator stressed that, in today's tech savvy society, work can be integral even if it is performed away from the company's premises, such as at the worker's home, or on the premises of the company's customer. Further, the profit or loss analysis should focus on the worker's ability to develop business beyond a current job. This factor dovetails into the "relative investment of the worker" as that which goes beyond a current job and could expand the worker's business, reduce the worker's cost structure or extend the reach of the worker's business.
The Administrator noted that no one factor is controlling. Rather, when classifying workers, employers should consider each factor in light of the ultimate determination of whether the worker is really in business for him or herself (and thus a true independent contractor) or is economically dependent on the company (and thus is truly an employee).
The DOL has also stressed that certain factors are immaterial in determining the existence of an employment relationship. For example, the fact that a worker has signed an agreement stating that the worker is an independent contractor is not controlling because the reality of the working relationship - and not the label given to the relationship in an agreement - is determinative.
To avoid liability under the new interpretation of "employ," employers should review any independent contractor relationships they currently use. Employers should next ensure these relationships satisfy the six criteria outlined above. Because of the complexity of this analysis, it is recommended that employers consult with an attorney to help in this evaluation.
For more information on the use of independent contractors, visit AGC’s Labor & HR Topical Resources website. The primary category is “Other Legal Issues” and the secondary category is “Independent Contractors.”
Editor’s Note: This article was written by guest author Maria F. Dwyer. Maria is a Member in Clark Hill’s Labor and Employment Group. This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.