On July 15, 2015, the U.S. Department of Labor (DOL), Wage and Hour Division, issued new interpretive guidance on proper classification of employees and independent contractors. In the guidance document, the DOL claims that misclassification of employees as independent contractors is “one of the most serious problems facing affected workers, employers, and the entire economy.” The guidance includes examples and case support for determining when a worker is an employee or an independent contractor. Notably, the DOL “clarifies” that “most workers are employees under the Fair Labor Standards Act’s (FLSA) broad definitions.”
Specifically, the DOL takes the position that the “economic realities test” governs the determination of independent contractor status. The economic realities test contains six separate criteria, 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.
According to the guidance, the ultimate question is whether the worker is “economically dependent on the employer or truly in business for him or herself.” It should be noted that the DOL also applies this analysis in determining employment or independent contractor status under the Migrant and Seasonal Agricultural Worker Protection Act and the Family and Medical Leave Act, in addition to the FLSA.
The independent contractor relationship is clearly under fire under by state and federal governments as a result of dwindling tax rolls that result from independent contractors as compared to employees. It remains to be seen the extent of deference federal courts will afford this interpretation. Employers are advised to closely review with counsel any independent contractor relationships they may have. The potential liability associated with a misclassification finding can be significant.
For more information, contact Jason Resnick at (949) 885-2253.
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