DOL Adminstrator Claims Most Independent Contractors Are Employees by Jerry L. Pigsley

In July, the U.S. Department of Labor Wage and Hour Division Administrator, David Weil, issued an “Administrator’s Interpretation” claiming that “[m]isclassification of employees [under the Fair Labor Standards Act] as independent contractors is found in an increasing number of workplaces in the United States” and that “some employees may be intentionally misclassified as a means to cut costs and avoid compliance with labor laws.”  WH Division Administrator’s Interpretation No. 2015‑1 (July 15, 2015).   
 
MOST INDEPENDENT CONTRACTORS ARE EMPLOYEES
 
The DOL Administrator, in his Interpretation, concluded “most workers are employees under the FLSA’s broad definition.”  According to the Administrator, DOL will apply the following “economic realities” factors to determine whether a worker is an employee or an independent contractor.  No single factor, including control, is to be over‑emphasized.  Rather, each of the following factors is to be considered to determine whether the worker is really in business for him or herself (and thus is an independent contractor) or is economically dependent on the employer (and thus is its employee).
 
ECONOMIC REALITIES FACTORS
 
1.      Is the work an integral part of the employer’s business?  Workers are more likely to be employees if they perform the primary work of their employer, even if it is just one component of the business and/or is performed by hundreds or thousands of workers, and even if it is performed at the worker’s home or on the premises of the employer’s customers. 
 
2.      Does the worker’s managerial skill affect the worker’s opportunities for profit or loss?  This factor focuses on whether the worker has the ability to use his or her managerial skill to affect the worker’s opportunity for profit or loss. 
 
3.      How does the worker’s relative investment compare to the employer’s investment?  The courts have found investing in tools and equipment is not necessarily a business investment that indicates that the worker is an independent contractor.  Instead, the tools and equipment may be necessary to perform the employer’s work.  Therefore, there will be analysis of the worker’s investment in comparison to the employer’s investment to determine whether the worker is an independent business.
 
4.      Does the work performed require special skill and initiative?  For skills to be indicative of independent contractor status, they should be used in some independent way, such as demonstrating business‑like initiative.
 
5.      Is the relationship between the worker and the employer permanent or indefinite?  Permanency or indefiniteness (employment‑at‑will) in the worker’s relationship with the employer will lead to the worker being considered an employee.  A worker’s lack of a permanent or indefinite relationship with an employer is indicative of independent contractor status if it results from the worker’s own independent business initiative.
 
6.      What is the nature and degree of the employer’s control?  The employer’s control will be analyzed as to whether the worker is economically dependent on the employer or truly an independent business person.  The worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business.  It is not what the worker could have done that counts, but as a matter of economic reality what they actually do that is dispositive.   
 
SUMMARY
 
ABC members who improperly classify employees as independent contractors may be penalized under the various labor laws, including for minimum wage and overtime, tax laws for failure to withhold and to pay FICA/FUTA, and workers’ compensation (failure to provide coverage).  Accordingly, ABC members should evaluate who they are classifying as independent contractors and evaluate whether they are properly classified under this new DOL Administrator Interpretation.   
 
By Jerry Pigsley, Chapter Attorney