The U.S. Department of Labor (DOL) has now issued guidance in the form of an Administrator’s Interpretation (the Guidance) intended to curb the misclassification of employees as independent contractors. The DOL contends that “most” workers qualify as “employees” under the Fair Labor Standards Act (“FLSA”) and therefore are subject by the Act’s minimum wage and overtime protections. Treating such workers as independent contractors would therefore violate the FLSA.
Background
The DOL contends that the use of independent contractors to perform work previously done by employees is on the rise. They even suggest that some employers deliberately misclassify their workers this way to cut costs and avoid legal compliance. The DOL recently has stepped-up scrutiny in this arena, recovering more than $79 million in back wages for more than 109,000 workers in various industries in 2014.
WHD Administrator’s Interpretation No. 2015-1
The Guidance notes that the FLSA is extremely broad and covers any entity that “suffers or permits” an individual to work. Under the “economic realities test,” the following factors are generally used to determine whether a worker is an independent contractor or an employee:
- the extent to which the work performed is an integral part of the employer’s business;
- the worker’s opportunity for profit or loss depending on his or her managerial skill;
- the extent of the relative investments of the employer and the worker;
- whether the work performed requires special skills and initiative;
- the permanency of the relationship; and
- the degree of control exercised or retained by the employer.
The Guidance directs these factors to be considered in totality and according to the “overarching principle that the FLSA should be liberally construed to provide broad coverage for workers.”
The Guidance sets out contrasting examples of how each of these factors is to be evaluated in order to give effect to the broad coverage they claim is intended under the law. A few highlights include:
Is the work an “integral” part of the business:
For a construction company that frames residential homes, carpenters are integral to the business – the company is in business of framing houses and that is what carpenters do.
In contrast, that company’s software developer might create programs that help track bids, schedule projects and maintain inventory. Such work is beneficial but not integral to the company’s business. Thus, this factor weighs in favor of independent contractor status.
The “managerial skill” factor:
A worker for an office cleaning service performs tasks outlined for him by the company. He does not make the schedule, nor does he solicit additional clients, advertise his services, or seek out ways to reduce costs. His efforts to earn more depend solely upon being assigned more hours by the company. There is no managerial skill involved, which indicates an employment relationship between the worker and the cleaning company.
If that same worker advertised his services, negotiated contracts with clients, set the cleaning schedule and brought in additional help when needed, this level of managerial skill would point toward an independent contractor status.
The “relative investment” factor:
The same cleaning company worker is issued all cleaning equipment and supplies for his jobs, and is assigned a vehicle for travelling to assignments. Although the worker may occasionally bring his own preferred cleaning products to his jobs, the company’s investment into the work is clearly greater and therefore favors a determination of an employment relationship.
If the worker buys a van not suitable for personal use and uses it to travel to various worksites, rents space to store the vehicle, and purchases all the material, supplies and equipment he uses to clean his clients’ facilities, an independent contractor relationship is suggested.
The “control” factor:
A registered nurse is listed with a nurse registry to provide skilled nursing. The registry interviewed the nurse and required her to undergo their multi-day training. The registry then sends the nurse a list of potential clients each week and requires the nurse to fill out a form with them prior to contacting any clients. The registry sets the wage range, limits the available work days and must be contacted if the nurse will miss any work to which she was assigned. This level of control points toward an employment relationship. ,
Another registered nurse might list with a different registry, which merely sends a list of potential clients. This nurse then is free to work for as many or as few clients as she wishes, may negotiate her own wage rate and may determine her own schedule with the client. In this scenario, the degree of control exercised by the registry is not indicative of an employment relationship.
Bottom Line
This is just an administrative interpretation that does not have the force of law. Nevertheless, it is a clear indication of how the DOL looks at the law and how they will decide claims of this type that are presented to them. Moreover, we know that courts often look to the DOL’s interpretations for guidance in deciding cases in their jurisdictions. Therefore, employers currently utilizing workers classified as independent contractors should revisit those arrangements to be very certain that they pass muster in an environment where employment status is so clearly the presumption in the eyes of the government regulators.