For employers classifying providers of personal services as “independent contractors” rather than employees, the United States Department of Labor (DOL) has just issued a warning: In its view, “most” American workers are really employees.
The Department’s Wage and Hour Division issued a 15-page interpretative “guidance” memorandum on July 15, seeking to clarify the sometimes difficult question of who should be classified as an employee for purposes of federal wage and hour laws.
While most misclassified employees are labeled “independent contractors,” increasingly employers are also classifying individuals rendering personal services as “owners,” “partners,” or “members of a limited liability company,” instead of as employees. Some employers intentionally misclassify employees as a means to cut costs and avoid compliance with labor laws.
According to the DOL, employers must apply an “economic realities” test to determine whether a worker is an employee or an independent contractor. Certain key factors should be considered in light of the ultimate determination of 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).
The classification issue is important because employees improperly labeled as independent contractors miss out on legal protections like minimum wage and overtime pay, reemployment assistance benefits, Workers’ Compensation insurance, and private group benefits.
In the guidance, Wage and Hour Division Administrator David Weil listed the following factors as requiring case-by-case analysis to properly determine an individual’s classification, with each factor having to be examined and analyzed in relation to one another, and no single factor being determinative:
- Is the Work an Integral Part of the Employer’s Business?
- Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
- How Does the Worker’s Relative Investment Compare to the Employer’s Investment?
- Does the Work Performed Require Special Skill and Initiative?
- Is the Relationship between the Worker and the Employer Permanent or Indefinite?
- What is the Nature and Degree of the Employer’s Control?
Under the Fair Labor Standards Act of 1938 (FLSA), “the scope of the employment relationship is very broad,” according to Mr. Weil.
The FLSA defines “employee” as “any individual employed by an employer,” and “employ” includes to” suffer or permit to work.” This “suffer or permit” concept has broad applicability, according to Mr. Weil, and is critical to determining whether a worker is an employee and thus entitled to the FLSA’s protections. The “suffer or permit” standard was specifically designed to ensure as broad of a scope of statutory coverage as possible, the guidance memorandum states.
The memorandum goes on to state that “Unlike the common law control test, which analyzes whether a worker is an employee based on the employer’s control over the worker and not the broader economic realities of the working relationship, the ‘suffer or permit’ standard broadens the scope of employment relationships covered by 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, according to Mr. Weil.
“The ultimate inquiry under the FLSA,” the memorandum states, “is whether the worker is economically dependent on the employer or truly in business for him or herself. If the worker is economically dependent on the employer, then the worker is an employee. If the worker is in business for him or herself (i.e., economically independent from the employer), then the worker is an independent contractor.”
The guidance memorandum may be accessed free online at:
http://online.wsj.com/public/resources/documents/InterpretMisclass.pdf
