U.S. Department of Labor Announces that Most Workers Are “Employees”
On July 15, 2015, the Wage and Hour Division of the United States Department of Labor (“DOL”) issued an administrator's interpretation, or guidance document on employee and independent contractor classification under the Fair Labor Standards Act (“FLSA”). Stating that the key consideration in classification decisions is whether the worker is economically dependent on a business, the DOL emphasized its view that most workers are employees under the FLSA.
Employers should be aware that the DOL will apply a very broad definition of “employee” when investigating a company's practices. The guidance opens by noting that worker misclassification is a growing issue and an area of significant concern to the DOL. Independent contractors, unlike employees, are not protected by a number of employment laws, including guarantees of minimum wage, overtime compensation, unemployment insurance, and workers' compensation, nor are they eligible to receive a variety of other employee benefits such as medical insurance and retirement plan participation.
Dr. David Weil, administrator for the U.S. Department of Labor's Wage and Hour Division, emphasizes that his division is tackling employee misclassification because so much depends upon the appropriate classification of employees. Misclassified employees are often denied access to the critical benefits and protections they are entitled. Misclassification also generates substantial losses to the federal government and state governments in the form of lower tax revenues, as well as to state unemployment insurance and workers' compensation funds. It forces workers to pay the entirety of their payroll (FICA) tax. It also tips the scales against all of the employers who play by the rules and undermines the economy.
Economic Realities Test
Under the FLSA, the definition of “employ” is to “suffer or permit to work.” The DOL states that this “very broad definition of employment” covers both work that the employer directs and work that it permits to take place. In applying the “suffer or permit” standard to determine whether a worker is an employee or an independent contractor, federal courts generally use some version of an “economic realities” test. The underlying purpose of this test is to determine whether a worker is economically dependent on an employer or is legitimately in business for herself. The guidance details the factors the DOL believes should be considered in making this determination. Those factors are:
- Is the work an integral part of the employer's business? (The more integral the work is, the more likely the worker is an employee.)
- Does the worker's managerial skill affect the worker's opportunity for profit or loss? (If it does, the worker is more likely to be an independent contractor.)
- How does the worker's relative investment compare to the employer's investment? (A lower investment by the worker makes it more likely that the worker is an employee.)
- Does the work performed require special skill and initiative? (If so, the worker is more likely to be an independent contractor.)
- Is the relationship between the worker and the employer permanent or indefinite? (A permanent or indefinite relationship suggests an employment relationship.)
- What is the nature and degree of the employer's control? (The more control exercised by the employer, the more likely the worker is to be an employee.)
It is important to note that the factors described in the guidance do not reflect a change in the law or in the DOL's view of worker classification. Prior DOL guidance and court decisions have long applied these and similar factors. But in its guidance, the DOL goes out of its way to stress its view that most workers should be treated as employees and indicates that this will be an area of focus for the agency going forward.
Concerns about being classified as an independent contractor?
Are you or someone you know currently classified as an “independent contractor”? Do you have questions about how your job is classified and the impact it has on your rights and compensation? If so, don't hesitate to contact leading California employment lawyers from Kingsley & Kingsley to take advantage of a free initial consultation. To discuss your situation call us toll-free at (888) 500-8469 or clicking here to contact us regarding your case.