If you hire workers as independent contractors, you need to review that status with fresh eyes in light of a new Administrator’s Interpretation issued by the U.S. Department of Labor (DOL). In his July 15th Interpretation, Wage and Hour Division Administrator David Weil stresses that most workers are employees under the Fair Labor Standards Act (FLSA), not independent contractors. Multiple factors still come into play when determining independent contractor status but the DOL ultimately will look to whether the worker runs his or her own independent business or instead, is economically dependent on the employer.
Broad “Suffer or Permit to Work” Standard
The FLSA defines “employ” as “to suffer or permit to work.” According to Administrator Weil, this broad definition will encompass most workers. He notes that the definition had roots in state child labor laws which sought to ferret out employers who used children as laborers illegally.
He also cites Supreme Court and federal court cases that state that the “suffer or permit to work” standard has broad applicability and extends to the farthest reaches in order to achieve the goals of protecting workers under the FLSA.
Economic Realities Test
Noting that courts have developed a multi-factor “economic realities” test to determine whether a worker is an employee or an independent contractor, the Administrator’s Interpretation goes through each factor, providing examples and cases that help in the analysis. While the factors haven’t really changed, here are some important distinctions made in this Interpretation:
- A contract setting forth an independent contractor relationship “is not relevant” in determining whether the worker is properly classified as an independent contractor; the actual working relationship is what matters, not the label given to it by the parties.
- The individual’s opportunity to make a profit or realize a loss on the job must include whether the individual’s managerial skills result in that profit or loss; in other words, a worker’s willingness or ability to work more hours or work more efficiently is not enough to suggest independent contractor status, instead the individual must be making managerial decisions about hiring assistants, purchasing materials, advertising, etc., in order to support independent contractor status.
- The worker’s investment in tools, equipment and doing the job must be compared to the employer’s investment; a worker who provides a few essential tools to do the job may not be enough to contribute toward independent contractor status; instead, the worker’s investment must be significant, particularly when compared to the entity’s investment in the job.
- Being highly skilled in a particular type of work is not sufficient in suggesting independent contractor status as many employees are highly skilled in the services they provide to their employer; instead, an independent contractor must include “business-like initiative.”
- The degree to which the entity controls the work of the individual should not play an oversized role in the analysis; many workers today are not under constant supervision of their employers but that lower degree of monitoring and control does not make them independent contractors.
The Administrator’s Interpretation establishes that no single factor in the economic realities test is determinative and each factor should be analyzed in terms of whether the worker is economically dependent on the employing entity or is truly in business for him- or herself.
Time to Review Your Independent Contractor Classifications
The DOL has made misclassification of employees a high priority for the past few years and with this Administrator’s Interpretation, it is signaling its intent to crack down even further on businesses who classify workers as independent contractors. We suggest that you review the Interpretation, study the examples and then audit your independent contractor relationships to determine whether your classifications will pass DOL scrutiny. In difficult cases, consult with your employment counsel for guidance. Conducting the review yourself and making any necessary changes will go a long way in avoiding headaches and potential liability should the DOL appear at your door for an audit. And, keep in mind that this Interpretation does not carry the force of law. The Administrator’s view will undoubtedly be challenged in court as the DOL ramps up its aggressive posture.
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