On July 15, 2015, Administrator David Weil of the Department of Labor (“DOL”) issued a guidance memorandum (the “Guidance”) that concludes most independent contractors are incorrectly classified and are employees under the FLSA. The Guidance comes from a DOL that has been actively bringing enforcement actions against employers for misclassifying workers as independent contractors who are exempt from FLSA minimum wage and overtime provisions. In reaching its bold conclusion, the DOL focuses on the idea that economic dependence is the prime determinant for considering whether a worker is an independent contractor or employee.
The DOL explains that a “worker who is economically dependent on an employer is suffered or permitted to work by the employer.” Therefore, because the FLSA’s definition of employ is “to suffer or permit to work,” most workers are employees and not independent contractors. In attempting to clarify the proper classification of workers, the Guidance lists several factors to consider. Unfortunately, the factors do not provide a hard and fast rule for employers to follow. The DOL explains that no one factor controls and the factors should be applied “with an understanding that [they] are indicators of the broader concept of economic dependence.” The true test is not to check off as many factors as possible, but to “determine whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor).”
Regardless, employers looking to avoid misclassification claims should consider the following factors when deciding whether a worker is an independent contractor:
Is the Work an Integral Part of the Employer’s Business?
The Guidance explains that if a worker performs work that is integral to the business, he or she is more likely to be economically dependent on the employer. In taking this view, the Guidance takes an expansive view of “integral.” The DOL explains that a worker’s tasks can be integral even if it is “just one component of the business and/or performed by hundreds or thousands of other workers.” The Guidance provides the example that a worker who answers calls at a call center is performing integral work.
Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
Under this factor, employers should consider whether there is an opportunity for the worker to experience a loss. Further, the Guidance explains that a “worker’s ability to work more hours and the amount of work available from the employer having nothing to do with the worker’s managerial skill and do little to separate employees from independent contractors – both of whom are likely to earn more if they work more and if there is more work available.” Essentially, if there is no opportunity for increased profit or loss in relation to the worker’s managerial skill, the worker is an employee, not an independent contractor.
How Does the Worker’s Relative Investment Compare to the Employer’s Investment?
Here, the DOL explains that for a worker to be considered an independent contractor, he or she should make some investment that could potentially lead to a loss. However, it is not total investment that should be considered, but relative investment to that of the employer. “If the worker’s investment is relatively minor, that suggests that the worker and the employer are not on similar footings and that the worker may be economically dependent on the employer.”
Does the Work Performed Require Special Skill and Initiative?
In looking at a worker’s skill, an employer should look at “business skills, judgment, and initiative, not his or her technical skills.” The DOL explains that even specialized skills do not indicate that a worker is an independent contractor.
Is the Relationship between the Worker and the Employer Permanent or Indefinite?
The Guidance explains that the more indefinite or permanent the relationship is between a worker and employer, the more likely it is that the worker is an employee. However, in coming to this conclusion, the Guidance states that “[e]ven if the working relationship lasts weeks or months instead of years, there is likely some permanence or indefiniteness to it as compared to an independent contractor, who typically works on one project for an employer and does not necessarily work continuously or repeatedly for an employer.” The key under this factor appears to be based more upon whether the worker has relationships spread across numerous employers than the duration of the relationship.
What is the Nature and Degree of the Employer’s Control?
Finally, to be an independent contractor, 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.” However, this factor still “should be analyzed in light of the ultimate determination whether the worker is economically dependent on the employer.” The DOL’s analysis under this factor concludes with the idea that “the ‘control’ factor should not play an oversized role in the analysis of whether a worker is an employee or an independent contractor. All possibly relevant factors should be considered, and cases must not be evaluated based on the control factor alone.
Employers should visit the DOL’s website and become familiar with the Guidance. Further, employers should be careful in designating workers as independent contractors, especially if the DOL’s arguments begin to make an impression on the courts. Regardless of the number of factors met, the DOL takes the stance that the crucial determinant is whether or not the worker is economically dependent on an employer.
To learn more about how the NLRB’s decision may affect your company or if you have any questions regarding these issues, please contact your labor and employment counsel at Smith, Gambrell & Russell, LLP.
To learn more or if you have any questions regarding these issues, please contact your labor and employment counsel at Smith, Gambrell & Russell, LLP.
This client alert is intended to inform clients and other interested parties about legal matters of current interest and is not intended as legal advice.