Department of Labor Issues Administrator’s Interpretation on Misclassifying Employees as Independent Contractors

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By: Karen L. Piper

 

Traditionally, a worker who controls how, when and where he performs his work is considered an independent contractor. If the business for which the worker performs his work controls how, when and where he performs his work, the worker is considered an employee of the business. This test for determining whether a worker is considered an employee is called the “right to control” test.

A worker who is classified as an “employee” under Fair Labor Standards Act (FLSA) must be paid minimum wage and overtime pay for all hours worked, unless he qualifies for an exemption (e.g., executive, administrative or professional). An independent contractor is considered in business for himself and does not need to be paid minimum wage or overtime pay.

The FLSA does not use the right to control test for determining whether a worker is an employee. It uses a multi-factor “economic realities” test. Under the economic realities test, the right of the business (for which the worker is performing work) to control how, when and where the worker performs the work is only one of six factors. No one factor is determinable.

On July 15, 2015, the United States Department of Labor (DOL), Wage and Hour Division, issued an Administrator’s Interpretation, No 2015-1, to provide additional guidance on how it applies the economic realities test. The Interpretation also signals the DOL’s intent to increase enforcement efforts against businesses which misclassify workers.

The six factors of the economic realities test are:

  1. The extent to which the work performed by the worker is an integral part of the business for which the work is performed;
  2. The worker’s opportunity for profit or loss, which depends on the worker’s managerial skills;
  3. The relative investments of the worker and the business for which the work is performed;
  4. The extent to which the work performed by the worker requires special skills and incentive;
  5. The permanency of the relationship between the worker and business for which the work is performed; and
  6. The degree of control the business exercises or retains over the worker’s performance of the work.

Most of the 15-page DOL Interpretation discusses how the DOL applies these six factors to specific situations, using case law and examples. The Interpretation emphasizes repeatedly that the six factors should not be applied as a checklist. Rather, the outcome must be determined based on a “qualitative rather than a quantitative analysis.”

The determination of employee status also is made without regard to the “label” the parties may use for the worker and/or any agreement they may have made. This is so because an “employee is not permitted to waive his employee status,” in an agreement. If the worker is economically dependent on the business for which he performs his work, he is not in business for himself; he is an employee.

Using the multi-factor economic realities test, the DOL concludes that “most workers are employees.” The DOL Interpretation is available at:

http://www.dol.gov/whd/highlights/archived.htm#Jul15_2015.

The DOL Interpretation should be taken as a wake-up call for all businesses to review their independent contractor relationships to make sure that these workers are truly in business for themselves. A worker who has been misclassified willfully can sue under the FLSA and obtain, as damages, up to three years’ back wages (both minimum wage and overtime pay), plus an equal amount in liquidated damages, plus attorneys’ fees and court costs.

If you need assistance in conducting this review, contact the author or another experienced employment attorney.

This article was written by Karen L. Piper, who is Secretary of the Board of Detroit SHRM, a member of the Legal Affairs Committee, and a Member of the law firm of Bodman PLC, located in its Troy MI office.  She can be reached at (248) 743-6025 or kpiper@bodmanlaw.com.

Detroit SHRM encourages members to share these articles with others, inside and outside their organization, as long as its name and logo, and the author’s information, is included in the re-post of the article. July 2015.