The United States Department of Labor (DOL) and other government agencies are aggressively pursuing businesses who misclassify employees as independent contractors.
On July 15, 2015 the DOL announced that it will be further cracking down on businesses that misclassify workers. The DOL also provided guidance as to how businesses should determine whether workers are employees or independent contractors. This HR Law Insider edition helps businesses interpret the DOL’s guidance in order to ensure compliance with the law (and avoid costly penalties).
THE DOL AND OTHER GOVERNMENT AGENCIES ARE ON A MISSION
On Monday the DOL proclaimed:
“The DOL continues to receive numerous complaints from workers alleging misclassification, and the Department continues to bring successful enforcement actions against employers who misclassify workers. In addition, many states have acknowledged this problematic trend and have responded with legislation and misclassification task forces. Understanding that combating misclassification requires a multi-pronged approach, the DOL has entered into memoranda of understanding with many of these states, as well as the Internal Revenue Service. In conjunction with these efforts, the DOL believes that additional guidance regarding the application of the standards for determining who is an employee under the Fair Labor Standards Act (FLSA ) may be helpful to the regulated community in classifying workers and ultimately in curtailing misclassification.”
Thus, businesses should immediately evaluate all of their independent contractor relationships with counsel — ensuring that each relationship has been properly classified.
THE STANDARD TO DETERMINE WHETHER A WORKER IS AN EMPLOYEE OR INDEPENDENT CONTRACTOR: THE DOL’S TEST FAVORS FINDING THAT WORKERS ARE EMPLOYEES
The FLSA’s definition of “‘employ’ includes to suffer or permit to work.” This “suffer or permit” concept has broad applicability and is critical to determining whether a worker is an employee and thus entitled to the FLSA’s protections. An “entity ‘suffers or permits’ an individual to work if, as a matter of economic reality, the individual is dependent on the entity.”
The Supreme Court has developed a multi-factor “economic realities” test to determine whether a worker is an employee or an independent contractor under the FLSA. The factors typically include: (A) the extent to which the work performed is an integral part of the employer’s business; (B) the worker’s opportunity for profit or loss depending on his or her managerial skill; (C) the extent of the relative investments of the employer and the worker; (D) whether the work performed requires special skills and initiative; (E) the permanency of the relationship; and (F) the degree of control exercised or retained by the employer.
The DOL’s guidance states that “applying the economic realities test, most workers are employees under the FLSA.”
In undertaking the test, each factor is examined and analyzed in relation to one another, and no single factor is determinative. The factors should be considered in totality to determine whether a worker is economically dependent on the employer, and thus an employee. The factors should not be applied as a checklist, but rather the outcome must be determined by a qualitative rather than a quantitative analysis. The application of the economic realities factors is guided by the overarching principle that the FLSA should be liberally construed to provide broad coverage for workers, as evidenced by the Act’s defining “employ” as “to suffer or permit to work.”
In applying the economic realities factors, courts have described independent contractors as those workers with economic independence who are operating a business of their own. On the other hand, workers who are economically dependent on the employer, regardless of skill level, are employees covered by the FLSA. “Ultimately, in considering economic dependence, the court focuses on whether an individual is ‘in business for himself’ or is ‘dependent upon finding employment in the business of others.’”
The DOL concluded its new guidance with the following message/warning to employers:
“In sum, most workers are employees under the FLSA’s broad definitions. The very broad definition of employment under the FLSA as “to suffer or permit to work” and the Act’s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor. The correct classification of workers as employees or independent contractors has critical implications for the legal protections that workers receive, particularly when misclassification occurs in industries employing low wage workers.”
In my experience, the DOL has been true to its word: audits and penalties are on the rise. This week’s DOL pronouncement is a clarion call to employers that enforcement will further increase. Companies should thus conduct audits with counsel now to either (1) reclassify improperly classified workers or (2) make changes that will cause improperly classified workers to properly fit within their existing classification.
This week’s HR Law Insider video touches on just one reason state and federal governments strongly enforce the proper classification of employees: