On July 15, the United States Department of Labor (DOL) issued guidance aimed at curbing the misclassification of employees as independent contractors, saying that most workers qualify as employees under the Fair Labor Standards Act (FLSA) and stressing the statute’s expansive definition of employment.
In the DOL’s first “administrator’s interpretation” of 2015, Wage and Hour Division head David Weil pointed out that employees improperly labeled as independent contractors may miss out on things like minimum wage and overtime pay, and added that correct classification has “critical implications” for the legal protections workers receive, particularly low-wage workers. The DOL’s efforts on this matter suggest they will aggressively police how businesses classify their workers and punish those guilty of misclassification.
The guidance notes the FLSA classifies more workers as “employees” compared to the common law control test. Courts use a multi-factor “economic realities” test to assess if a worker is an employee under the FLSA, meaning he or she is “economically dependent” on their employer. A worker may be classified as an independent contractor if he or she is not economically dependent on an employer, but is, instead, “in business for him or herself.”
Employers are to analyze six different factors of their employees when classifying the nature of their employment status. The six “economic realities” factors are as follows:
- 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 business investment compare with the employer’s business investments?
- Does the work performed require special skill and initiative?
- Is the relationship between the worker and employer permanent or indefinite?
- What is the nature and degree of the employer’s control?
The factors should not be “analyzed mechanically or in a vacuum,” and no one factor should get too much weight. Rather, the factors should serve as a road map for determining economic dependence or independence. Ultimately, whether a worker is an employee under the FLSA is a legal question determined by the economic realities of the working relationship between the employer and the worker, not by job title or any agreement the parties may make.
Although the DOL’s guidance is not binding law and there is no certainty regarding the level of deference courts will afford it, employers should take the DOL’s latest enforcement action threat seriously. Weil warned that the department is ready and fully intent on using its enforcement tools against employers that maintain independent contractor relationships contrary to the guidance, specifically those who deliberately misclassify employees in an attempt to cut costs. The DOL increased its budget by $32 million in 2015 and hired more than 300 full-time employees to ramp up their enforcement efforts. The DOL’s efforts follow California’s crackdown on the misclassification of independent contractors – both in the legislative and regulatory arena.
If you have any questions about how the DOL guidance affects your business, or if you are interested in taking preventative internal action, please contact the attorneys at Carlson & Jayakumar at (949) 222-2008, or visit us at www.cjattorneys.com.