Employees vs. Independent Contractors: The DOL Weighs in on Worker Misclassification
Yesterday, the U.S. Department of Labor (DOL) issued an Administrator’s Interpretation that provides some important new guidance on the standard for classifying workers—as employees or independent contractors—under the Fair Labor Standards Act (FLSA). And make no mistake: This guidance clearly intends to make it more difficult than ever for employers to classify their workers as anything other than regular employees.
In short, the guidance reaffirms that, for FLSA purposes, the DOL will use the so-called “economic realities” test to determine how a worker should be classified. And, under this test, the ultimate inquiry is whether the worker “is economically dependent on the employer” (and, therefore, should be classified as an employee) or “truly in business for him or herself” (and, therefore, may be classified as an independent contractor).
The DOL has also indicated that, in undertaking this “economic realities” analysis, there are a number of factors to consider, specifically:
- The extent to which the worker’s work is an integral part of the employer’s business
- Whether the worker’s managerial skill affects the worker’s opportunity for profit or loss
- How the worker’s relative investment compares to the employer’s investment
- Whether the work performed requires special skill and initiative
- Whether the relationship between the worker and the employer is permanent or indefinite; and
- The nature and degree of the employer’s control
The DOL has also made it clear that no one factor is determinative and that employers should not apply these factors in a “mechanical fashion” but should instead view them as “indicators of the broader concept of economic dependence.”
Perhaps the most important part of the guidance is the DOL’s clear direction that employers must apply the “economic realities” test expansively so that it covers more workers as employees. At one point, the guidance notes that application of the “economic realities” factors should be guided by the “overarching principle that the FLSA should be liberally construed to provide broad coverage for workers.” The DOL clearly views worker misclassification as a problematic trend and appears determined reverse it.
The DOL has also made clear that it believes the common law test for worker classification (which tends to focus primarily on the extent to which the employer controls the worker) is too narrow for purposes of the FLSA, specifically noting that the FLSA’s “economic realities” test “provides a broader scope of employment” than the common law test.
Thus, even if a worker might be properly classified as an independent contractor under the common law control test, that worker does not necessarily satisfy the “economic realities” test for purposes of compliance with the FLSA’s wage and hour requirements. Employers who have relied on the common law control test to classify workers as independent contractors would be wise to take a fresh look at whether those workers also satisfy the DOL’s test in view of the new interpretive guidance.
Department of Labor’s (DOL) 15-page Guidance for Classifying Workers