On July 15, 2015, the U.S. Department of Labor (“DOL”) issued an Administrator’s Interpretation No. 2015-1 providing further guidance regarding classification of independent contractors. The DOL points out that “[w]hen employers improperly classify employees as independent contractors, the employees may not receive important workplace protections such as the minimum wage, overtime compensation, unemployment insurance, and workers’ compensation. Misclassification also results in lower tax revenues for government and an uneven playing field for employers who properly classify their workers.” http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.htm
The DOL continues to rely upon the economic realities test, while adopting the definition of employee used by the Fair Labor Standards Act (“FLSA”). The economic realities test is guided by six separate factors, including whether:
• the work performed is an integral part of the employer’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 relatively minor as compared to the employer’s investment;
• the worker exercises business skills, judgment, and initiative in the work performed; and
• the worker has control over meaningful aspects of the work performed.
Although each of these factors must be considered, the DOL looks more closely at whether the contractor is performing work that is integral to the business. The critical inquiry, however, is whether the worker is “economically dependent on the employer or truly in business for him or herself.”
The DOL further recommends that economic realities test should guided by the FLSA’s broader interpretation of “employ,” which includes “to suffer or permit to work.” This definition is the most expansive application. The DOL explained that:
A worker who is economically dependent on an employer is suffered or permitted to work by the employer. Thus, applying the economic realities test in view of the expansive definition of “employ” under the Act, most workers are employees under the FLSA. The application of the economic realities factors must be consistent with the broad “suffer or permit to work” standard of the FLSA.
While the DOL uses this analysis for purposes of the FLSA, Family Medical Leave Act (“FMLA”) and Migrant and Seasonal Agricultural Worker Protection Act, misclassification can have a much broader impact. For example, as noted by the DOL, misclassification can impact coverage under numerous employment statutes, unemployment insurance, worker’s compensation and tax contributions.
In light of the potential consequences, employees and employers should consult experienced employment counsel for assistance applying the appropriate classification, particularly in the construction, housekeeping, in-home care, and trucking services, which have been identified by the DOL as the most common culprits of misclassification.