U.S. DOL Issues Administrator’s Interpretation on Employee Misclassification

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The misclassification of workers as independent contractors has been an ongoing challenge for employers and workers alike. Due to the fact that contractors lack many workplace protections—such as minimum wage or workers’ compensation rights—and that misclassification results in lower tax revenues for the government, the U.S. Dept. of Labor (“DOL”) recently released Administrator’s Interpretation No. 2015-1. This interpretation, published on July 15, 2015, provides guidance on the existing rules for classifying employees.

First and foremost, the interpretation stresses that the definition of an employee under the Fair Labor Standards Act (“FLSA”) is designed to be as far-reaching as possible. An “employee” is “any individual employed by an employer,” and the FLSA definition of “employ” is “to suffer or permit to work.” This broad definition therefore includes parties who work for an employer but are not strictly supervised by them.

The DOL explains that the long-standing “economic realities” test, used to determine employee versus independent contractor status, is based upon the idea that a business “suffers or permits” an individual to work if, as a matter of economic reality, the worker is economically dependent on the company. The “economic realities” test consists of six major components. However, the DOL emphasizes that these six questions are not a mechanical “checklist” for determining if a worker is an independent contractor. Rather, these factors are meant to guide employers in gauging the degree of economic dependence a worker has on the entity for which they work. The six factors are:

  1. Is the work an integral part of the employer’s business?
    If the work performed is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer—for example, a carpenter is an integral part of a construction company’s business. The work performed can still be integral even if it is only one component of the business, performed interchangeably by many other workers (e.g., a call center), or performed off the employer’s premises.
  2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
    Workers may not be economically dependent on an employer if they are able to make decisions that result in their own profit or loss. For example, a worker performing cleaning services for corporate clients, who advertises, negotiates contracts, decides which jobs to perform and when to perform them, decides to hire helpers to assist with the work, and recruits new clients, exercises managerial skill that affects his or her personal opportunity for profit and loss.
  3. How does the worker’s relative investment compare to the employer’s investment?
    An independent contractor invests in their own business beyond any one particular job or contract. Even if the investment costs a substantial amount, it can still be considered “minimal in comparison” if the business with whom the worker contracts has expended more. The investment must therefore be significant in nature and magnitude relative to the employer’s investment in its overall business. For example, a strawberry grower might purchase shovels and picking carts to perform his or her work; however, the business’s total investment in land and heavy machinery far outweighs the grower’s investment, demonstrating the grower and business are not on similar footing.
  4. Does the work performed require special skill and initiative?
    The DOL states that special business skills, judgment, and initiative, not a worker’s technical skills, aid in determining whether a worker is economically dependent. For example, an electrician who provides skilled labor to a construction firm, but does not advertise to solicit additional jobs, does not determine what orders to fill, and does not determine when and the quantity of materials to order, is not exercising business skills. He or she is simply providing skilled labor.
  5. Is the relationship between the worker and the employer permanent or indefinite?
    A permanent or indefinite relationship with an employer suggests employee status due to the economic dependence on the employer. In contrast, an independent contractor typically completes one project and does not necessarily work continuously or repeatedly for a business. However, the reason for the lack of permanence or indefiniteness needs to be reviewed to determine if the reason is indicative of the worker running an independent business. The key is whether the lack of permanence or indefiniteness is due to operational characteristics intrinsic to the industry (e.g., individuals who work part-time or are employed through a staffing agency) versus the worker’s own business initiative.
  6. What is the nature and degree of the employer’s control?
    The nature and degree of an employer’s control must be evaluated in determining independent contractor status, including whether a worker exercises actual control over “meaningful aspects of the work performed,” such that it is possible to view the worker as a person conducting his or her own business. The DOL notes that an employer does not need to perform direct, everyday supervision in order to exercise control. For example, the DOL distinguishes nurses who provide in-home care as a result of being matched with clients through a registry. If the registry requires the nurse to adhere to a certain wage range, undergo specific company training, and coordinate work hours with the registry and subject to company policy, the registry would exhibit material control over the work performed. In contrast, a nurse who freely selects the clients, determines the amount of hours and days worked, negotiates her own pay and schedules directly with clients, exercises a degree of control indicative of an independent contractor.

The “economic realities” test can be confusing, given that each factor is meant to be analyzed in conjunction with the others. The six factors ultimately aim to answer the question “is this worker in business for him or herself, or economically dependent on the employer?” Overall, the DOL makes its opinion on the matter of classification clear, stating that “only … workers who operate as independent businesses … are independent contractors,” which means that “most workers are employees under the FLSA’s broad definitions.”

Additionally, the DOL specifically states that this analysis should be applied in determining whether a worker is an employee for purposes of the Migrant and Seasonal Agricultural Worker Protection Act (MSPA), and the Family and Medical Leave Act (FMLA). Employers who currently work with independent contractors should therefore carefully review the nature of their working relationship to avoid any possible complaints of misclassification.

Action Items:

  1. Review the Administrator’s Interpretation No. 2015-1, available on the U.S. Department of Labor’s website.
  2. Examine any working relationships your business has with independent contractors to ensure compliance with the DOL’s “economic realities” test.
  3. For further guidance, subscribers should call HR On-Call at (888) 378-2456.

Disclaimer: This document is designed to provide general information and guidance concerning employment-related issues. It is presented with the understanding that ManagEase is not engaged in rendering any legal opinions. If a legal opinion is needed, please contact the services of your own legal adviser.

© 2015 ManagEase, Incorporated.

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