Employers are “suffering” as DOL’s interpretation limits independent contractor classification

Blog Post
Employers may wish the U.S. Department of Labor (DOL) took the summer off, but no such luck. On the heels of issuing a proposed rule that will amend the Fair Labor Standards Act’s (FLSA) “white collar” exemptions, the DOL’s Wage and Hour Division (WHD) issued Administrator’s Interpretation No. 2015-1, entitled “The Application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who Are Misclassified as Independent Contractors,” on July 15, 2015.

The Administrator’s Interpretation does not purport to change DOL policy but was published to provide employers with guidance regarding what the agency considers to be proper application of the standards for determining who is an employee under the FLSA, the primary federal law governing minimum wages and overtime pay. The DOL notes that the same analysis should also be applied in determining whether a worker is an employee or an independent contractor in cases arising under the Migrant and Seasonal Agricultural Worker Protection Act and the Family and Medical Leave Act. In the Administrator’s Interpretation, the DOL advances its position that employers are misclassifying workers as independent contractors – explaining that “the FLSA defines ‘employ’ broadly as including ‘to suffer or permit to work,” which clearly covers more workers as employees.” 

As reported in my June 11 blog post, David Weil, the head of the DOL’s WHD, told employers that he would be putting out an administrator interpretation that aimed to clarify who legitimately qualifies as an independent contractor as part of the DOL’s on-going efforts to identify and correct misclassification of workers as independent contractors. Why is misclassification a top priority of the DOL? Misclassified workers may be denied access to benefits and protections – such as family and medical leave, overtime, minimum wage, and unemployment insurance – to which they would otherwise be entitled. Also, according to the DOL, misclassification generates substantial losses to the Treasury and the Social Security and Medicare funds, as well as to state unemployment insurance and workers’ compensation funds, because employers are not paying the proper FICA and unemployment insurance taxes or workers’ compensation premiums. 

The Administrator’s Interpretation states that a multi-factorial “economic realities” test should be used in making the determination whether a worker is an employee or an independent contractor under the FLSA rather than just a limited analysis of the employer’s control over the work relationship. The economic realities test focuses on whether the worker is economically dependent on the employer (and, thus, its employee) or in business for him or herself (and, thus, its independent contractor). In an apparent effort to slant the economic realities test in favor of finding employee status, the DOL repeatedly states that the test is to be applied consistent with the “broad” “suffer or permit to work” standard of the FLSA.

The Administrator’s Interpretation addresses each of the factors of the economic realities test, providing citations to case law and examples. 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 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 Administrator’s Interpretation states that all of the factors must be considered in each case, and no one factor is determinative of whether a worker is an employee. However, the DOL emphasized the importance of the “integral to the business” factor – noting that courts find it “compelling” and stating that “if the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer” – and downplayed the importance of the “control” element of the analysis. In discussing the control element, which is often considered by courts to be the most critical factor in determining if an employer/employee relationship exists, the DOL said that the analysis must take into account a worker’s amount and actual (versus theoretical) exercise of control over meaningful aspects of the work and not just his or her control over hours of work. In addition, the DOL rejected the argument that certain controls exercised over workers due to statutory regulatory requirements should not be considered to be “control” exerted over workers for purposes of the misclassification analysis. 

The DOL also set forth more onerous and employee-friendly interpretations of other factors in the test. For example, the Administrator’s Interpretation states that the “profit and loss” factor should not focus just on whether there is opportunity for a worker’s profit or loss (i.e., the worker’s ability to work more hours and the amount of work available from the employer), but rather on whether the worker has the ability to make decisions and use his/her managerial skill and initiative to affect opportunity for profit or loss. The DOL also altered the “worker’s investment” prong of the analysis, requiring consideration of both the nature and extent of the worker’s investment as well as comparison of the investment to that of the employer. The DOL hammered this point by stating that “investing in tools and equipment is not necessarily a business investment or a capital expenditure that indicates that the worker is an independent contractor.”

Moreover, the examples in the Administrator’s Interpretation reflect the DOL’s view that whether the worker performs work for multiple entities or a single entity is critical to the analysis of whether the worker is economically dependent on the employer. In addition, the DOL stated that, much like a job title is not determinative of exemption status under the FLSA, “an agreement between an employer and a worker designating or labeling the worker as an independent contractor is not indicative of the economic realities of the working relationship and is not relevant to the analysis of the worker’s status.” 

The DOL abandoned its use of opinion letters tailored to specific wage and hour compliance queries and began issuing administrator interpretations in 2010. The Administrator’s Interpretation on independent contractor classification likely constitutes an interpretative rule, meaning that the guidance is not binding on the regulated community, but courts have given deference to such agency interpretations – especially when the interpretation is largely consistent with court analysis of the subject. 

Classification of workers as employees or independent contractors is a difficult, complicated task and getting it “right” has been an on-going concern of employers because of the potential for liability under, among others, wage and hour and tax laws. This Administrator’s Interpretation highlights the DOL’s continuing focus on the issue of misclassification of employees as independent contractors. Employers are wise to conduct a review of their independent contractor relationships in light of the DOL’s interpretation of the economic realities test under the FLSA and similar laws.
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