Continuing its attack on misclassification of employees, the U.S. Department of Labor released new guidance on July 15 that clarifies how companies should distinguish between employees and independent contractors.
The guidance isn’t a change in policy, which would require regulatory steps. But courts often use such interpretations to decide lawsuits.
The DOL interpretation stresses that the definition of “employment” in the Fair Labor Standards Act () is broad, and that employers are probably violating the law if they treat workers who are integral to the business as independent contractors. “In sum, most workers are employees under the FLSA’s broad definitions,” the guidance concludes.
Employers are supposed to consider several “economic realities” when classifying workers. Historically, the degree of control the company exerts over the worker has been the most significant. However, the new guidance warns that the factors “should be considered in totality ... the ‘control’ factor should not play an oversized role in the analysis.”
The DOL’s new guidance clearly moves further away from using control over a worker’s day as the crucial element in determining employee or independent contractor status. Instead, the interpretation focuses on the economic realities of the relationship—that is, whether the worker is economically dependent on the employer or in business for him or herself.
Under the FLSA, 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 FLSA, most workers are employees according to the new interpretation, especially workers in low-wage occupations who by nature are likely to be economically dependent on the company using their services.
Bottom line: Under the new interpretation, most workers are employees. Employers that want to use independent contractors properly should apply the economic realities test to each proposed independent contractor. Each factor should be considered in light of the ultimate determination of whether the worker is really in business for him or herself (and thus is an independent contractor) or is economically dependent on the employer (and thus is its employee). The factors should be used as guides to answer that ultimate question of economic dependence.
Advice: Be sure to seek legal guidance if you have any doubt about whether a particular worker is an independent contractor or would be more properly classified as an employee. You don’t want to get this wrong.