New DOL guidance cracks down on employers’ use of independent contractors

Continuing its attack on misclassification of employees, the U.S. Labor Department released new guidance on July 15 that aims to clarify how businesses should distinguish between employees and independent contractors.

The 15-page interpretive guidance isn’t a change in federal policy, which would require several more regulatory steps. But courts often use such DOL interpretations when deciding lawsuits.

The bottom line: The guidance stresses that the Fair Labor Standards Act (FLSA) definition of “employment” is very broad, and that employers are probably violating the law if they’re treating workers who are integral to the business as independent contractors.

Employers are supposed to consider several “economic realities” when classifying workers, including how much control the employer has over the worker’s tasks and schedule. The guidance warns that the factors, “should be considered in totality … the ‘control’ factor should not play an oversized role.”

“In sum, most workers are employees under the FLSA’s broad definitions,” the guidance concludes.

The ‘uberization’ of the U.S. economy

The so-called sharing economy has spawned a whole new breed of independent contractors. Uber, the alternative to regulated taxi rides, is just one example of new and creative startups that use independent contractors instead of employees.  

Some independent contractors have sued these new services, alleging that they are really employees and that the model is just a way to misclassify employees and skirt the FLSA, IRS rules and state protections.

In recent years, the DOL and IRS have increasingly exerted their muscle in the employee versus independent contractor debate. The DOL began a massive “misclassification initiative” to target employers with more audits and closer scrutiny. State labor departments have also jumped into the act.

To lead his fight against the “uberization” of the economy, President Obama hired Boston University professor David Weil to head up the DOL’s Wage & Hour Division. Weil authored the influential book, The Fissured Workplace, that introduced the term “fissuring” to describe the practice of hiring independent contractors as much as possible, replacing employees. Weil is fundamentally opposed to the practice because, he says, it has increased the number of employees mistakenly placed into the independent contractor category, plus placed pressure on other employers not using the tactic to also misclassify workers as independent to keep up with the competition.

Impact of the new DOL guidance

The DOL’s new interpretative 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 FLSA’s term of art, “to suffer or permit to work,” and the economic realities of the relationship. This is a significant shift.

In order to make the determination whether a worker is an employee or an independent contractor under the FLSA, DOL uses an “economic realities” test (see box below). It focuses on whether the worker is economically dependent on the employer or in business for him or herself.

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 under the FLSA according to the new interpretation, especially workers in low-wage occupations who by nature are likely 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.

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.


Employee or Independent Contractor: The ‘Economic Realities’ Test

 To classify workers as either employees or independent contractors, the DOL says employers should use this “economic realities” test. The agency’s new interpretive guidance makes clear that employers should consider all points equally, not put too much emphasis on #6 (employer control). The DOL says too many employers make that mistake.

  1. Is the work an integral part of the employer’s business? Example: Carpenters are integral to a construction business, software developers are not.
  2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss? A janitor cleans for a cleaning company that assigns him to corporate clients – he doesn’t schedule clients himself. He is an employee.
  3. How does the worker’s relative investment compare to the employer’s investment? A cleaner uses a cleaning company’s truck, equipment and cleaning solutions. She’s an employee. A cleaner purchases a special cleaning vehicle and equipment and solicits clients. She may be an independent contractor.
  4. Does the work performed require special skill and initiative? A highly skilled carpenter builds cabinets for a construction company. He’s an employee. If he has his own shop, buys his own wood and solicits special contracts, he may be an independent contractor.
  5. Is the relationship between the worker and the employer permanent or indefinite? An editor has worked with the same publisher for years, editing its books. She’s an employee. Another editor works with many publishers and sometimes turns down assignments. She may be an independent contractor.
  6. What is the nature and degree of the employer’s control? A nurse must accept every client a registry refers to her. She’s an employee. A nurse can turn down clients. She may be an independent contractor.