DOL Issues New Interpretive Guidance Regarding Independent Contractor Misclassification

On July 15, 2015, the Wage and Hour Division of the U.S. Department of Labor (DOL) issued guidance on determining whether a worker is an independent contractor or an employee under the Fair Labor Standards Act (FLSA). Independent contractor misclassification has been an ongoing enforcement priority of the DOL. For employers, the classification of workers as independent contractors carries the significant implications of not being required to pay unemployment insurance taxes, workers’ compensation premiums, and Social Security and Medicare contributions on behalf of those workers. Unsurprisingly, the position taken by the DOL in this guidance is that the majority of workers are employees, not independent contractors, under the FLSA.

The FLSA defines “employ” as “to suffer or permit to work.” According to the DOL, this definition, along with the “economic realities” test, provides for a broad scope of employment. The economic realities test focuses on whether a worker is economically dependent on the employer or in business for him or herself. If the worker is economically dependent on the employer, then the worker is an employee. If the worker is in business for himself and therefore economically independent from the employer, the worker is an independent contractor. The factors considered in the economic realities test include:

• 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 skill and initiative;
• The permanency of the relationship; and
• The degree of control exercised or retained by the employer.

The DOL points out none of these factors should be deemed determinative, and that application of the factors is guided by the principle that the FLSA should be broadly construed to provide coverage for workers.

While the guidance is neither law nor a rule, it is nonetheless significant because it strongly indicates that misclassification continues to be an enforcement priority for the agency, and cements the DOL’s view that far too many workers are currently being misclassified. As a result, in the context of an agency investigation, employers may have difficulty showing that a worker is an independent contractor in all but the most obvious situations. As such, employers should reevaluate their worker classifications and utilization of independent contractors.

For more information on this article, or if you have questions regarding employer responsibilities with respect to worker classification, please contact Attorney Tara Craft Adams at tadams@seatonlaw.com, 952-921-4618, or any attorney at Peters, Revnew, Kappenman & Anderson, P.A.

Please join us for our upcoming webinar: Americans with Disabilities Act (ADA) - Minimize the Lawsuit Risks to Your Business. Attorney Martin Kappenman will be a presenter at this webinar on July 29, 2015, hosted by the Minnesota Chamber of Commerce. For more details or to register, please visit www.seatonlaw.com and click on ‘seminars.’