The Wage and Hour Division of the Department of Labor has issued the much-anticipated Administrator’s Interpretation on Misclassification.
As the guidance makes clear, employers misclassifying employees as independent contractors remains a key enforcement priority of the DOL. This focus is readily apparent as the guidance starts with several pages reiterating that the definition of employee should be very broad.
Under the FLSA, in order to determine if a worker is an employee, an “economic realities” test rather than a common law control test governs. The economic realities test focuses on whether the worker is economically dependent on the employer or truly in business for him or herself.
The economic realities test examines several factors, typically including:
- the extent to which the work performed is an integral part of the employer’s business;
- the worker’s opportunity for profit or loss depending on his or her managerial skill;
- the extent of the relative investments of the worker and the employer;
- whether the work performed requires special skill and initiative;
- the permanency of the relationship; and
- the degree of control maintained by the employer.
After reviewing the guidance, there is nothing controversial in the guidance; rather, it merely reiterates the standards that have been applied by courts in determining whether a worker is truly an independent contractor. The guidance does provide lots of examples for employers to understand how the factors will be applied and is recommended reading.
Any one of the factors is not supposed to carry more weight than any of the other factors, but employers should keep in mind a couple of common facts that can be problematic if they are trying to classify a worker as an independent contractor:
- the worker works exclusively for the employer;
- the worker does not have any risk of profit or loss, i.e., they are paid hourly and all expenses are reimbursed by the employer; and
- the worker works indefinitely or for an extended term for the employer and is not simply hired to complete a specific project.
In the end, employers should remember the closing remarks of the guidance: “[i]n sum, most workers are employees under the FLSA’s broad definitions.”