New Department of Labor Interpretation Renders Independent Contractors an Endangered Species

On July 15, 2015 the U.S. Department of Labor (DOL) issued an Administrator Interpretation aimed at eradicating what the DOL perceives as widespread improper misclassification of “employees” as “independent contractors” in violation of the Fair Labor Standards Act (FLSA). According to the DOL, misclassifying workers as independent contractors results in workers being deprived of important protections such as minimum wage, overtime compensation, unemployment insurance and workers compensation benefits available to employees. The DOL also pointed to the loss in payroll tax revenues to the government and the intentional misclassification by some employers to cut costs and avoid compliance with labor laws. Citing the “economic realities test” used by the courts to determine whether a worker is an employee or independent contractor under the FLSA, the DOL declared that “in view of the expansive definition of ‘employ’ under the Act, most workers are employers under the FLSA.”

The DOL’s expansive interpretation “employ” under the FLSA: The FLSA simply defines “employ” as “to suffer or permit to work.” Historically, the multi-factored “economic realities test” has been applied to determine whether an employer “suffers or permits” an individual to work within the meaning of the FLSA. The economic realities test considers whether:

• the work being performed is an integral part of the company’s business
• the worker’s managerial skill affects the worker’s opportunity for profit or loss
• the worker is retained on a permanent or indefinite basis
• the worker’s investment is minor as compared to the company’s
• the worker exercises business skills, judgment and initiative; and
• the degree of control exercised by the company

Although the test in not new, the Interpretation stressed that:

“no one factor (particularly the control factor) is determinative of whether a worker is an employee . . . . Ultimately, the goal is not simply to tally which factors are met, but to determine whether the worker is economically dependent on the employer (and thus an employee) or is really in business for him or herself (and thus and independent contractor). “

In minimizing the control factor (historically used to determine employment status prior to the enactment of the FLSA), the DOL noted that “technological advances and enhanced monitoring mechanisms” enable companies to employ workers without the need to exercise day-to-day control, and thus the control factor should not pay an “oversized role” in the analysis.

In short, absent a showing that a worker classified as an “independent contractor” has multiple clients, performs work that is not central to the company’s business, and would continue to maintain a viable business on his/her own if the relationship was terminated, the DOL will likely deem the worker an economically dependent employee under the FLSA.

Impact of the DOL’s presumption: The consequence for employers of the DOL’s pronouncement that most workers are employees under its expansive interpretation of the FLSA will significantly expand the ranks of workers who are eligible for overtime, minimum wage and other statutorily-mandated benefits available to employees, as well as discretionary benefits (e.g., vacation time) typically offered by companies to employees. Aside from the prospective economic impact on employers now facing a greater universe of employees entitled to benefits, misclassified employees may pursue legal claims seeking to recoup those benefits that were denied them in the past because they were improperly classified as independent contractors.

The DOL’s Interpretation is the latest is a series of legal attacks upon employers’ wage and hour practices.  As we reported in a previous Employment Alert, the New Jersey Supreme Court has adopted a stringent test for determining independent contractor status that, like the DOL’S focus, will place significant emphasis on whether the “independent contractor” truly maintains a viable business that would endure even if its relationship with the company is severed.  In addition, as we also reported in a prior publication, the DOL’s Interpretation comes on the heels of the Department’s proposed revisions to the white collar exemption regulations that will significantly increase the number of employees who are eligible for overtime compensation.

Clearly, the practice of classifying workers as independent contractors is under increasing attack and employers must resist the temptation to do so if the worker cannot meet the very stringent requirements under the FLSA and state wage and hour laws. More important, to avoid continuing liabilities for overtime and other employment benefits, employers should seek guidance from employment counsel to determine whether current independent contractor positions do not meet the requirements and if not, how to navigate the reclassification of these positions to employees.