On July 15, 2015, Administrator David Weil, of the Wage and Hour Division of the U.S. Department of Labor (“DOL”), issued an Administrator’s Interpretation (“Interpretation”) making clear that the vast majority of workers are employees, not independent contractors, regardless of how explicit an agreement between a worker and business defines the relationship as one of an independent contractor.
Click HERE to read the DOL’s Administrative Interpretation.
According to the Interpretation, “misclassification of employees as independent contractors is found in an increasing number of workplaces” and is done by employers to skirt labor laws, because workers misclassified as independent contractors may not receive minimum wage, overtime compensation, unemployment insurance, and worker’s compensation benefits.
Before the Fair Labor Standards Act (“FLSA”), an employment relationship was defined by the degree of control the business asserted over the worker. The more control the business retained over the worker, the more likely the worker was found to be an employee of the business. The FLSA intended to provide a broader scope of employment than found under the “control” test. As a result, according to the DOL, the vast majority of workers are properly classified as employees under the FLSA, rather than independent contractors.
The FLSA broadly defines “employ” as “to suffer or permit to work,” and an “employee” is “any individual employed by an employer, which is “any person acting directly or indirectly in the interest of an employer in relation to an employee.” 29 U.S.C § 203 (emphasis added). Clarity is rarely the forté of legislation.
To clear up the definition of an employee under the FLSA, courts introduced the “economic realities” test. Unlike the previously used “control” test, which hinged the classification of a worker as an employee solely on the degree to which the business controlled how an employee went about doing his or her job, the economic realities test uses multiple factors to distinguish employees and independent contractors in a way that should be consistent with the “FLSA’s statutory directive that the scope of the employment relationship is very broad,” according to the DOL. Under the economic realities test, the DOL posits that a worker is an employee, rather than an independent contractor, if the worker is economically dependent on the business (in contrast to a worker who is economically independent and operating a business of its own) after analyzing the totality of the following factors:
- Is the work performed by the worker an integral part of the putative employer’s business? The more important the worker’s produce is to the alleged employer’s business, the more likely that worker is an employee. That doesn’t mean the worker’s work must be unique or performed at the employer’s premises. In fact, even work capable of being recreated by a multitude of other workers, or performed from the comfort of one’s home, may be integral to the employer’s business.
- Does the worker’s opportunity for profit or loss depend on his or her managerial skill? The DOL likens independent contractors to those who operate their own businesses. Usually, that means the possibility of experiencing not only profits, but losses as well, based on the owner’s managerial skill. Employees, on the other hand, usually don’t face a risk of loss, but derive more profit from working more or having more work available to them, not from the managerial skill used by independent contractors to eschew losses in favor of profits.
- How does the investment of the worker compare to that of the putative employer? A worker who makes some investment, incurring a risk of loss, is more likely to be an independent contractor than an employee. But not all investments are equal. A worker who invests only in the tools needed to complete a task is likely an employee, since that investment isn’t in furtherance of any business beyond the given task. An independent contractor’s investment would put her on more equal footing compared to the investment of the alleged employer.
- Does the work performed by the worker require special skills and initiative? Specialized or technical skills alone do not indicate independent contractor status, but a worker’s business skills, judgment, and initiative will bear on determining whether the worker is economically independent of the employer.
- Is the relationship between the worker and employer permanent or temporary? Usually, permanency or indefiniteness (such as an at-will relationship) indicates that a worker is an employee. Conversely, a worker brought on to perform one project is more likely an independent contractor.
- How much control does the employer exert over the worker? A worker who controls meaningful aspects of his or her work is more likely an independent contractor than an employee. Workers subject to employer’s control over his or her work schedules, his or her attire, and the tasks the worker carries out are more likely to be employees. An employer that exerts control in the name of regulatory requirements, customer satisfaction, or the nature of its business is still exerting the type of control typical of the employee-employer relationship.
In light of the DOL’s interpretation that most workers are employees, employers should review their non-employee classifications and make adjustments as necessary. To learn more about the Fair Labor Standards Act or your particular employment circumstances, contact us at (312) 216-2720.