Last week, the U.S. Department of Labor (DOL) announced new guidance to determine whether workers should be classified as employees or independent contractors under the federal Fair Labor Standards Act (FLSA). After receiving numerous complaints from workers alleging misclassification, on June 15 the DOL published Administrator’s Interpretation No. 2015-1 (AI 2015-1), the first publication of its kind in more than one year.
The distinction between “employee” and “independent contractor” is extremely important because it impacts the protections to which a worker is entitled. Under the FLSA, employees are entitled to minimum wage, overtime compensation, unemployment insurance, and workers’ compensation. By contrast, independent contracts are not protected by the FLSA.
AI 2015-1 instructs that an “economic realities” test should be utilized to determine whether a worker is an employee or an independent contractor. This test focuses on whether a worker is economically dependent on the employer and thus an employee, or whether the worker is in business for him or herself and thus an independent contractor. The DOL made it clear that it believes the vast majority of workers should be classified as employees, with independent contractors only arising in certain limited circumstances.
The economic realities test involves analyzing the following 6 factors:
- Whether the work performed is an integral part of the employer’s business;
- Whether the worker’s opportunity for profit or loss depends on his or her managerial skill;
- Whether the worker’s relative investment compares to the employer’s investment;
- Whether the work performed requires special skills and initiative;
- Whether the relationship between the worker and employer is permanent or indefinite; and
- The nature and degree of control exercised or retained by the employer.
The test involves a subjective “totality of the circumstances” analysis, meaning no one factor is determinative and there is no bright-line rule. Further, the label an employer gives to a particular worker’s status is not determinative, so designating a worker as an independent contractor is not necessarily relevant to the analysis of that worker’s employment status.
So what does this new guidance mean for business owners? Here are some important takeaways:
- The DOL believes the majority of workers are properly classified as employees. As such, classification as an independent contractor is restricted to very limited circumstances.
- Employers should conduct a full and careful review, preferably under the guidance of an experienced labor and employment attorney, of the scope of work being performed by a particular worker before classifying that individual as an independent contractor.
- Entering into agreements to classify a worker as an independent contractor will not necessarily protect an employer from liability.
If you own or operate a business and have questions about the impact of AI 2015-1 on your business, or have questions about employees and independent contractors generally, feel free to contact an attorney at Dalton & Tomich to discuss your matter.