The Administrator of the US Department of Labor’s (DOL) Wage & Hour Division, David Weil, has issued a formal Interpretation on the subject of “The Application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who Are Misclassified as Independent Contractors,” the DOL’s first on the issue since President Obama took office in 2008. Administrator’s Interpretation No. 2015-1, July 15, 2015.
The Interpretation is not so much an unanticipated directive or a presentation of new methods, as a detailed reminder on the factors used by the DOL to distinguish between employees and independent contractors for purposes of that differentiation. Along with that Interpretation, Weil has drafted a blog post on the topic, summarizing the basic issues effectively.
In short, the DOL will continue to rely on the “economic realities” test that has been the standard analysis tool since at least the 1990’s (and set forth by the DOL in a Fact Sheet as recently as 2014). At that time, the economic realities test eclipsed the long-applied common law “control” test, which analyzed whether an individual was an employee based upon the amount of employer’s control over the work being done. The economic realities test is a multi-factored analysis of the effect of the relationship among a worker, a company, and the specific terms of the relationship between the two.
According to Administrator Weil, the definition of “employ” under the Fair Labor Standards Act (FLSA) – to “suffer or permit” to work – was designed to insure as broad a scope of statutory coverage as possible, and should be interpreted in that way. The first three pages of his 15 page guidance spell out the history of the “suffer or permit” standard, and highlight that broad applicability.
The remainder of the document sets out the six questions used to determine the independent contractor/employee status of an individual under the economic realities test, and includes numerous case cites and examples to illustrate each point. Here are those questions, with some of those illustrative points:
- Is the Work an Integral Part of the Employer’s Business?
- If an individual’s work is integral to the company, that individual is likely to be an employee.
- Work can be integral to an employer’s business even if it is performed away from the employer’s premises.
- Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
- This factor focuses on “whether the worker has the ability to make decisions and use his or her managerial skill and initiative to affect opportunity for profit or loss.”
- An independent contractor faces the possibility to not only make a profit, but also to experience a loss.
- How Does the Worker’s Relative Investment Compare to the Employer’s Investment?
- Independent contractors typically make some investment (and therefore undertake at least some risk for a loss) in the business.
- But the individual’s investment must be “significant in nature and magnitude relative to the employer’s investment in its overall business” to lead to an ultimate designation of independent contractor.
- Does the Work Performed Require Special Skill and Initiative?
- A worker’s business skills, judgment, and initiative – and not simply his technical skills – are critical factors in determining whether a worker is an independent contractor.
- “[F]or skills to be indicative of independent contractor status, they should be used in some independent way, such as demonstrating business-like initiative.”
- Is the Relationship Between the Worker and the Employer Permanent or Indefinite?
- “A worker’s lack of a permanent or indefinite relationship with an employer is indicative of independent contractor status if it results from the worker’s own independent business initiative.”
- What is the Nature and Degree of the Employer’s Control?
- The worker himself must be in control of meaningful aspects of the work performed in order to be viewed as an independent contractor.
- However, “workers’ control over the hours they work is not [by itself] indicative of independent contractor status.” (In other words, a flexible work schedule alone does not make an individual an independent contractor.)
Most workers will be “employees” rather than “independent contractors” under the FLSA’s broad definitions and the economic realities analysis. Also, the fact that so many court opinions were cited in the Interpretation to support this conclusion may indicate the DOL’s attempt to convince courts to give the Administrator’s Interpretation more weight than would typically be given to a guidance of this nature.
The correct classification of workers as employees or independent contractors, especially in combination with the recent proposed changes to white-collar overtime regulations, is a clear indication of the focus of the DOL’s future compliance enforcement efforts regarding employee classification issues. Employers ignore this indication at their peril.