The U.S. Department of Labor (“DOL”) has made a big splash this summer with not one, but two major announcements that will expand worker coverage under the Fair Labor Standards Act (“FLSA”) and, no doubt, cause employers to reconsider the configuration and costs of their current workforce. On July 6, 2015, the DOL published a Notice of Proposed Rulemaking that, when finalized, would immediately extend overtime protection to almost five million white collar workers who are currently not entitled to overtime pay because they are exempt from the FLSA.

Shortly thereafter, on July 15, the DOL’s Wage and Hour Division Administrator David Weil issued Administrator’s Interpretation No. 2015-1 (“Interpretation”) advocating the DOL’s position that most workers are employees covered by the FLSA and that many employers throughout the country are improperly misclassifying workers as independent contractors.

“White Collar” Exemptions Narrowed

In 2014, President Obama directed the DOL to enhance the FLSA’s so-called “white collar” exemptions, which currently exempt from overtime full-time salaried executive, administrative, and professional employees who earn at least $455 per week, or $23,660 per year. The DOL’s proposed rule would require these employees to earn more than double that salary threshold—i.e., $970 per week, or $50,440 per year—in order to be considered exempt employees under the FLSA. In addition, the highly compensated employee exemption, which can be relied on to relax the duties requirements under the “white collar” exemptions, would increase from $100,000 to $122,148. Notably, the foregoing salary requirements would further increase annually to adjust for inflation.

The proposed rule does not, however, set forth any enhancements or modifications to the duties requirements under the “white collar” exemptions. Under the current federal regulations, exempt work must constitute the employee’s “primary duty.” That is a qualitative analysis, not a quantitative one. However, the proposed rule invites comments regarding the amount of time that employees should be engaged in executive, administrative, or professional work to qualify for the exemption. Moreover, the DOL specifically requested comments relating to California’s requirement that exempt duties be performed more than 50 percent of the time—a quantitative analysis. Thus, the DOL has suggested the possibility of another significant change to “white collar” exemptions.

The deadline for comments to the proposed rule has passed; the DOL will review the comments that it received, respond where appropriate, and issue its final regulations. The regulations will not be subject to Congressional approval. It is important to note that when the “white collar” exemptions were last revised in 2004, the DOL received more than 100,000 comments and spent nearly a full year responding to those comments before finalizing the regulations. Accordingly, we should not expect the final rule until 2016.

Extinction of the Independent Contractor

Addressing the DOL’s argument that most workers are employees and not independent contractors, the Interpretation concludes that most workers are employees because, among other reasons, they are not truly in business for themselves.

The Interpretation is based, albeit quite loosely, on the well-known and relied-upon six-factor “economic realities” test that the DOL and courts consider when determining whether there exists a bona fide employment relationship. The DOL was careful, however, to emphasize only certain aspects of the test that tend to support employee status. The DOL addressed the following aspects of the economic realities test:

• The Work Must Not Be an Integral Part of the Employer’s Business

The Interpretation states that job duties are likely to be an “integral part” of an employer’s business if they relate to the employer’s actual products or services. In most instances, the DOL argues, workers are performing work that is directly related, indeed integral, to the employer’s underlying business. However, a true independent contractor’s work is unlikely to be integral to the employer’s business.

• There Must Be a Real Opportunity for Profit or Loss

The Interpretation emphasizes that the opportunity for profit or loss reflects independent contractor status only when it is dependent on the worker’s managerial skill. However, the DOL opines that the fact that a worker can increase his or her earnings by working longer hours for the putative employer is not evidence that the worker is an independent contractor.

• The Worker’s Investment Must Be Significant

The Interpretation states that the worker’s investment must be significant when compared to the investment of the employer in order for the worker to be considered an independent contractor.

• The Work Performed Requires Special Business Skills

The Interpretation argues that a worker’s skills as an independent business, not his or her technical skills, support independent contractor status. The DOL further states that technically skilled workers who are economically dependent on a putative employer are not operating as independent contractors.

• The Relationship Is Finite

The DOL states that the relationship between the worker and putative employer should be finite and that the finite nature of the relationship should be the result of the worker’s own business initiative—i.e., the worker’s decision, not the putative employer’s—in order for the worker to qualify as an independent contractor.

• The Amount of Employer Control Is Limited

The Interpretation emphasizes that an independent contractor must control meaningful aspects of the work, demonstrating that the worker is conducting his or her own business.

In light of the DOL’s recent aggressive agenda to expand worker coverage under the FLSA, it is important for employers to carefully audit their contractor and exempt employee populations, identify high risk areas, and consider whether to reclassify or pursue other remediation measures, such as utilizing contractors who are employees of third-party vendors or augmenting the job duties of borderline exempt positions.