DOL Increases Focus on Misclassified Independent Contractors

In Administrator's Interpretation No. 2015-1 (the "Interpretation"), the Department of Labor (the "DOL"), provides guidance on determining whether a worker should be classified as an employee rather than a independent contractor. The DOL's new guidance emphasizes that most workers should be classified as employees rather than independent contractors. 

The Interpretation outlines the DOL's view that worker misclassification is not harmless. Rather, the DOL notes that improper classification risks important workplace protections like minimum wage and overtime compensation under the Fair Labor Standards Act (the "FLSA"), unemployment insurance, and workers’ compensation. The DOL also points to other consequences like reducing tax revenues and an uneven playing field for employers who follow the rules. 

The DOL uses the economic realities test to focus analysis on whether the worker is economically dependent on the employer or in business for himself.  The economic realities test evaluates six factors: 

1. is the work performed integral to the employer’s business; 
   
   
2. does the worker’s managerial skill affect his opportunity for profit or loss; 
   
   
3. is the engagement on a permanent or indefinite basis;  
   
   
4. does the worker have a relatively minor investment as compared to the employer’s investment;  
   
   
5. does the worker exercise business skills, judgment, and initiative in the work performed; and 
   
   
6. whether the worker has control over meaningful aspects of the work performed. 
   
   

No one factor is determinative, and the factors must be considered in relation to one another and in totality.  The ultimate decision is made on a qualitative rather than a quantitative basis and is guided by the overarching principle that the FLSA should be liberally construed to provide broad coverage for workers.  The DOL notes that courts have described independent contractors as those workers with economic independence who are operating a business of their own.  The DOL's view of classification means that workers who are economically dependent on the employer, regardless of skill level, are employees covered by the FLSA.  

Allegations of worker misclassification may create problems for employers, including DOL investigations, enforcement actions, and private litigation. Independent contractor relationships are under increasing scrutiny.  Employers should closely review independent contractor relationships, agreements, and their practices to determine the extent of the risk and any need to re-evaluate worker classifications.