DOL Issues Guidance Concluding that Most Workers are Employees Under the FLSA
The Department of Labor (DOL) recently issued new guidance addressing independent contractor classification under the Fair Labor Standards Act (FLSA). In Administrator’s Interpretation No. 2015-1, the DOL interprets the classification standard expansively and concludes that “most workers are employees under the FLSA.”
The FLSA defines an “employee” as “any individual employed by an employer” and the definition of “employ” includes “to suffer or permit to work.” This “suffer or permit to work” concept is interpreted broadly and is critical to determining whether a worker is an employee entitled to the FLSA’s protections.
In determining which workers are suffered or permitted to work, the DOL advises that the “economic realities” test, rather than the common law “control” test, should be used. The economic realities test focuses on whether a worker is economically dependent on an employer or in business for himself or herself. If the worker is economically dependent on the employer, then the worker is an employee. If the worker is in business for himself or herself (i.e., economically independent from the employer), then the worker may be classified as an independent contractor.
This determination is guided by a number of factors, including:
- Whether the work is an integral part of the employer’s business. If work performed by a worker is integral to the employer’s business, it is more likely that the worker is an employee economically dependent on the employer. Work can be integral to a business even if it is just one component of the business, is performed by other workers and/or is performed away from the employer’s premises.
- Whether the worker’s managerial skill affects the worker’s opportunity for profit or loss. A worker in business for himself or herself faces the possibility of not only making a profit, but also experiencing a loss. The worker’s managerial skill will often affect opportunity for profit or loss beyond the current job (e.g., by leading to additional business from other parties or by reducing the opportunity for future work). The worker’s ability to increase profit by working more hours and the amount of work available from the employer have nothing to do with the worker’s managerial skill and therefore often are not relevant to this inquiry.
- How the worker’s relative investment compares to the employer’s investment. To indicate that a worker is an independent contractor, his or her investment must be significant in nature and magnitude relative to the employer’s investment in its overall business. Such investments by a worker should be similar to the investments of the employer. These investments may include, for example, purchasing a vehicle that is not suitable for personal use and using it to travel to various worksites, purchasing materials and equipment, and renting space to store materials, as well as advertising and marketing.
- Whether the work performed requires special skill and initiative. A worker’s managerial and business skills, judgment, and initiative should be considered. These differ from the worker’s technical skills. Relevant managerial and business skills may include, for example, marketing the worker’s services, determining when to order materials and the quantity of materials to order, determining which orders to fill, and deciding the sequence of work.
- Whether the relationship between the worker and the employer is permanent or indefinite. Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee. In contrast, an independent contractor typically works on one project for an employer and not continuously or repeatedly for the employer. However, a lack of permanence or indefiniteness does not automatically suggest an independent contractor relationship. 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 and not just “operational characteristics intrinsic to the industry.”
- The nature and degree of the employer’s control. The worker must control meaningful aspects of the work performed in order to be an independent contractor. Such control must be more than theoretical - the worker must actually exercise it.
No single factor is determinative or should be over-emphasized. Rather, each factor should be considered in light of the ultimate question of whether a worker is in business for himself or herself or is economically dependent on the employer. The DOL’s overarching principle in determining employment status is that the FLSA’s broad definition of employment should be liberally construed to provide broad coverage.
Administrator’s Interpretation No. 2015-1 indicates a continued focus on independent contractor classification as the DOL works to increase the number of workers eligible for overtime under the FLSA. Although this guidance represents only the DOL’s opinion on the law and is not legally binding on courts, it remains to be seen whether courts will adhere to it. Employers should continue to pay attention to this issue and watch for reactions from the courts. Additionally, in light of the anticipated increase in enforcement activity by the DOL, it would be prudent for employers to assess workforce classifications and re-evaluate questionable classifications at this time.
If you have any questions about the FLSA or if you would like to learn more about the issues covered in this alert, please contact your Smith Anderson lawyer.