On July 15, 2015, the United States Department of Labor, through its Wage and Hour Division (DOL), issued an Administrator’s Interpretation (Interpretation) stating that most workers do not qualify as independent contractors under the Fair Labor Standards Act (FLSA). The Interpretation comes on the heels of the DOL’s Notice of Proposed Rulemaking that would significantly reduce the availability of overtime exemptions under the FLSA.

Economic Realities Test

According to the Interpretation, an employer’s reliance on the common law “control” test is misplaced. Instead, the DOL states that the proper classification of a worker as an independent contractor depends on whether the worker satisfies the factors of the “economic realities” test, which includes the following questions:

1. Is the work an integral part of the employer’s business?
2. Does the worker’s managerial skill affect his/her opportunity for profit/loss?
3. How does the worker’s relative investment compare to the employer’s investment?
4. Does the work performed require special skill and initiative?
5. Is the relationship between the worker and the employer permanent or indefinite?
6. What is the nature and degree of the employer’s control?

DOL concludes that using this test and applying it “in view of the expansive definition of “employ” [i.e., to “suffer or permit to work”] under the [FLSA], most workers are employees under the FLSA.”

The goal, according to the DOL, is to determine “whether the worker is economically dependent on the employer or truly in business for him or herself.” To make this determination correctly, the employer must consider each factor, above, with no single factor, particularly the control factor, taking more importance than the others. “The factors should be used as guides to answer that ultimate question of economic dependence.”

What Should Employers Do In Response?

The DOL is definitely letting employers know the test it will apply to make misclassification decisions and what its focus will be when it audits employers who use independent contractors. For employers, this should trigger an internal examination of their use and classification of independent contractors under this most recent guidance by the DOL. Employers should take any necessary steps to mitigate the risk of misclassification.