The DOL Increases FLSA Pressure

July 15, 2015

On July 15, 2015, the Administrator of the U.S. Department of Labor’s Wage and Hour Division (DOL) issued guidance regarding the proper classification of workers as independent contractors. The DOL claims that they are issuing the guidance because they are concerned that too many companies are misclassifying employees to escape overtime requirements, worker’s compensation and payroll taxes. The guidance is a reminder to employers that the DOL interprets the Fair Labor Standards Act (FLSA) broadly and that the DOL will take the position that the test for determining who is an independent contractor reflects that broad scope.    

The guidance itself is detailed and heavily reliant on case-law that supports the DOL’s interpretation but also avoids contrary authority. The DOL opines that, based on the FLSA definition of “employ” as “suffer or permit to work,” and the manner in which federal courts have applied the “economics realities test,” that “most workers are employees under the FLSA’s broad definitions.” This conclusion follows that of at least one state, Vermont, whose Department of Labor has concluded that 99 percent of all workers working for Vermont employers should be classified as employees and not independent contractors.

Importantly, the DOL noted that the “right to control” is only one factor in the independent contractor analysis. The other factors are whether (1) the worker’s work is “integral” to the company’s business; (2) the worker has an opportunity to enjoy a profit or suffer a loss on the work; (3) the investment the worker has made in his or her business versus the relative investment made by the company; (4) the work requires special skills or initiative; and (5) the relationship is permanent or near permanent. The DOL argues that these factors should be interpreted broadly such that, on the first factor, a worker that performs a task that is “just one component of the business” might be improperly classified as an independent contractor. With respect to the second factor, the worker’s ability to increase his or her profit simply by increasing the amount of work they do or by accepting additional assignments does not satisfy the test, rather, the profit or loss must be a result of “the worker’s managerial skill.” On the third factor, “[t]he worker should make some investment (and therefore undertake at least some of the risk for a loss) in order for there to be an indication that he or she is an independent business.” That investment must be compared to the company’s investment, and the Administrator cites to a Tenth Circuit Court of Appeals case in which the investment by the worker of $35,000-$40,000 was determined to be insufficient to satisfy the economic realities test.

The “special skills” component relates to the “worker’s business skills, judgment and initiative, not his or her technical skills.” Lastly, the “permanency” requirement is intended to separate the worker who performs one project and then moves to a new project for a different company versus one who remains dependent on one company for work or who may perform occasional projects for the same company. Thus, even a worker who performs work for other companies and/or who is not reliant on a single company for their primary source of income might be considered an employee rather than an independent contractor. With respect to the “right to control” factor, the guidance distinguishes between a worker’s theoretical right to control the meaningful aspects of their work versus the worker actually exercising that right. The DOL’s guidance applies to employee classification under both the FLSA and the Family and Medical Leave Act (FMLA).

As many Georgia employers have noticed, the State of Georgia Department of Labor has already been aggressively investigating independent contractor relationships. The Federal DOL has been more focused on employee misclassification as it relates to improperly classifying employees as exempt from overtime. Coming on the heels of the DOL’s proposed rules altering the test for determining overtime exemption, the DOL’s guidance makes it clear that the DOL will be more active and aggressive in investigating employee/independent contractor misclassification claims. Employers should closely evaluate the status of every individual who is performing work for the company and ensure that those employees are properly classified because misclassifying employees can result in companies being liable in significant amounts for violations of the minimum wage and overtime provisions of the FLSA, the FMLA, the tax laws and laws related to employee benefits. Taylor English’s Employment and Labor Relations practice group contains experts in evaluating worker classification situations and stands ready to assist in this process.

‹ Alerts