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DOL Issues Guidance on Misclassification of Independent Contractors

July 16, 2015
On Wednesday, the Department of Labor (DOL) Wage and Hour Division released Administrator's Interpretation No. 2015-1, which outlines the Department's expectations for the standard to be applied when determining whether a worker is an independent contractor or an employee covered by the Fair Labor Standards Act (FLSA). The guidance seeks to help workers and employers determine whether a worker is truly in business for themselves (and thus not covered by the FLSA) or if he or she is substantially dependent on his or her employer's business (and thus covered by FLSA protections).
The guidance lays out the Department's clear expectation that most workers are to be covered by wage and hour protections of the FLSA, and that the definition of employment should be construed broadly. It notes that it receives numerous complaints from workers alleging misclassifications. It goes on to note that the Department has entered into memoranda of understanding (MOU) with many states to combat the problem of misclassification by sharing information and coordinating with law enforcement. One such memorandum was recently entered into in the state of Kentucky. Other states with MOUs include Alabama, California, Colorado, Connecticut, Florida, Hawaii, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, New Hampshire, New York, Rhode Island, Texas, Utah, Washington, Wisconsin and Wyoming. (For more information, including state-specific agreements, click here.) 
The new guidance discusses the "suffer or permit to work" standard in the FLSA. This standard was established initially as a means of ensuring that employers did not illegally employ child laborers through middlemen. It was adopted by the FLSA as a standard that would be broad enough to capture most workers and be constructed in a way that would not permit employers to skirt the law by structuring a business in a way that separated the employer from direct supervision of employees. Well-established case law applies the "economic realities test" as a means of determining whether an employee is "suffered or permitted" to work for an employer. The economic realities test is a subjective test that considers multiple factors to determine whether a worker is economically dependent on his or her employer. Factors that are considered include: (A) the extent to which the work performed is an integral part of the employer’s business; (B) the worker’s opportunity for profit or loss depending on his or her managerial skill; (C) the extent of the relative investments of the employer and the worker; (D) whether the work performed requires special skills and initiative; (E) the permanency of the relationship; and (F) the degree of control exercised or retained by the employer.
The guidance sets forth several questions to be considered in determining true economic independence for independent contractors. These are:
  1. Is the work an integral part of the employer's business?
  2. Does the worker's managerial skill affect the worker's opportunity for profit or loss?
  3. How does the worker's relative investment compare to the employer's investment?
  4. Does the work performed require special skill and initiative?
  5. Is the relationship between the worker and the employer permanent or indefinite?
  6. What is the nature and degree of the employer's control?
The guidance notes that many employers focus too much on the "control" factor when determining that a worker is an independent contractor, without adequately evaluating additional factors. The guidance includes several examples of situations that would or would not meet the economic realities test. It concludes by saying that "most" workers are employees under the FLSA's broad definitions. Further, "The factors should not be analyzed mechanically or in a vacuum, and no single factor, including control, should be over-emphasized." It ends by saying, "The correct classification of workers as employees or independent contractors has critical implications for the legal protections that workers receive, particularly when misclassification occurs in industries employing low wage workers."
As ANCOR members are aware, the Obama administration has made worker protections and higher wages a priority of the past several years. The Department of Labor has recently issued several rules, proposed rules, and guidance regarding various wage and hour laws that have a significant impact on providers. As this is a priority for the administration, it is important for stakeholders to stay engaged as ANCOR continues to work to shape policy on labor issues.