Everyone’s talking about the United States Department of Labor’s new Administrative Interpretation regarding misclassification of workers as independent contractors (IC’s) rather than as employees. OK, maybe not everybody, but lots of people who care about this issue certainly are. I’ve written about the misclassification issue here, here, here and here. The Administrative Interpretation –technically– does not change anything. The law (the Fair Labor Standards Act) is the same. Why then, should we care about this Administrative Interpretation? The name gives us a partial answer: It gives some insight into how the DOL will interpret and apply those laws going forward . Join The EmpLAWyerologist after the jump, where we will learn more…
Many of you following this blog know that I am a big believer in getting background information before jumping right into some of the meaty topics we have explored in the past. Well, this topic is no exception! So here are some (hopefully) brief background points:
The Fair Labor Standards Act establishes minimum wage, overtime, record keeping, and child labor standards for full and part-time employees in both the public and private sectors. A worker who is an independent contractor is not protected by the FLSA, and therefore cannot avail him/herself of minimum wage and overtime pay, workers’ compensation or unemployment benefits or any other benefits that an employer might otherwise offer its acknowledged employees.
If one hires a worker and wrongfully classifies him or her as an independent contractor when s/he really should be classified as an employee, the consequences can be quite draconian. Employers could end up paying two to three times the wages owed — plus attorneys’ fees. Here’s the problem: the FLSA itself is not very helpful in defining who is an “employee”. It does define “employ” as “suffer or permit to work”. Decades of case law on that very issue attest to how unhelpful that definition has been–and, along with regulations, has led to what is known as the “economic realities” test. We’ll look at the specific factors considered by the “economic realities” test after I wax poetic (OK, maybe not so poetic) with some general points about the economic realities test and the DOL’s guidance.
In general, the economic realities test, comprised of six factors, looks to the economic realities of the relationship between the worker and the (would-be?) employer. Over time, the DOL has boiled this test down to whether the worker is economically dependent on thebusiness of the would-be employer’s or is truly in business for him/her/itself. The test looks at the totality of the circumstances that create or define the relationship. As such, no one factor is dispositive– which, of course, does not really promote greater clarity for employers or workers in determining proper classification. Sigh. There’s more though. Courts do not necessarily apply the economic realities test. Some states have their own tests which can vary slightly or even a lot. Other federal laws may also define “employees” and “IC’s” differently, resulting in the possibility of a worker being an IC for some purposes but not others. Yikes! Now what? For now, let’s just stick to classification for purposes of the FLSA and minimum wage and overtime-related issues.
Here are the six factors of the economic realities test:
- 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.
In next week’s post I’m going to talk more in-depth about these six factors. I still have some other general points about the Administrative Interpretation where I still need to wax not so poetically. Here they are:
The substance of the Administrative Interpretation is not really a change from anything that came before it. In other words, the Administrative Interpretation really does not offer clarification on the actual definition of employee or IC. So what does it do then? What’s all the big fuss about? It shows us how the DOL is prepared to treat the issue. Essentially, the DOL, in its 15-page memorandum, straight-up, says “most workers are employees under the FLSA’s broad definitions”. The memorandum also says that the DOL is making worker misclassification an enforcement priority and it cites the increasing use of independent contractors.
That said, let’s look next week at how the DOL actually applies those six factors. (Sorry, I don’t mean to keep you in suspense, but inundating you with a really, inordinately long post just seems like bad form.) We will use some examples in an attempt to get at least a little clarity, and hopefully give you an indication of whether you should be concerned about how you classify your workers. Until then, Au Revoir!
Disclaimer: This post’s contents are for informational purposes only, are not legal advice and do not create an attorney-client relationship. Always consult with competent employment counsel on any issues discussed here.
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