Updated Worker Classification Guidance From DOL: What It Really Means

On July 15, 2015, David Weil of the Department of Labor, Wage and Hour Division, issued a letter providing guidance on how the Department would determine who is an “employee” and therefore covered under the Fair Labor Standards Act (FLSA).    

The fifteen-page document begins with an acknowledgement that the Department of Labor is finding an “increasing number” of worker misclassifications in the workplace. 

The Interpretation should be reviewed by any company that engages independent contractors. Although the new guidelines are not a significant departure from the DOL’s “economic reality” in determining who is an independent contractor, it is clear the DOL is does not follow the less-stringent “common law” standard.  The Administrator has determined the term “employee” is broadly defined under the FLSA and is applicable to “most workers.” 

Definitions

The Administrator’s Interpretation is derived from three important definitions in the FLSA: 

1. The FLSA’s definitions establish the scope of the employment relationship under the Act and provide the basis for distinguishing between employees and independent contractors.
2. The FLSA defines “employee” as “any individual employed by an employer,” 29 U.S.C. 203(e)(1), and “employer” as including “any person acting directly or indirectly in the interest of an employer in relation to an employee,” 29 U.S.C. 203(d).
3. The FLSA’s definition of “‘employ’ includes to “suffer or permit to work.” 29 U.S.C. 203(g). This “suffer or permit” concept has broad applicability and is critical to determining whether a worker is an employee and thus entitled to the Act’s protections. (Administrator’s Interpretation No. 2015-1 at page 3, emphasis added.) 

The Interpretation emphasizes the “suffer or permit” standard was intended by Congress to encompass as many workers as possible due to the commonplace use of child labor when the FLSA was enacted.    The Interpretation goes on to provide many historic examples of the broad definition this standard has given by the Courts. 

Economic Dependency

The major test under the FLSA of the “suffer or permit” standard is set forth in this statement:

The ultimate inquiry under the FLSA is whether the worker is economically dependent on the employer or truly 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 him or herself (i.e., economically independent from the employer), then the worker is an independent contractor.

The Courts have generally followed a six-factor test to determine whether a worker is “economically dependent”:

• The extent to which the work performed is integral to 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
• The degree of control exercised or retained by the employer 

The factors must be considered in their totality; no single factor is determinative.   Examples of how each factor would be applied are provided in the Administrator’s Interpretation in detail. 

Conclusions and takeaways: 

1. This Interpretation does not represent a significant departure from the DOL’s reliance on the “economic reality” standard to determine independent contractor status, but it emphasizes this standard is very stringent and “most workers” are employees under the FLSA. 
2. The DOL will construe “employee” under the “suffer or permit” on a broader basis than the common law control tests used by the IRS and many states.
3. For guidance in determining if the worker is “economically dependent” on the employer, there is a six factor test.  Each of the economic dependency factors “is examined and analyzed in relation to one another, and no single factor is determinative.” 
4. The standard of whether a worker is an independent contractor is based upon whether or not the worker is in business for him or herself.  The worker must exercise considerable managerial skill and control over their own business. 
5. The DOL has increased its compliance efforts and currently has entered into Memorandums of Understanding with 25 states and the Internal Revenue Service to share information regarding suspected violators. 

Consult with your legal advisor if you have any uncertainty as to the correct classification of a worker under the FLSA.

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The Administrator’s Interpretation may be found on the DOL website at this page: http://www.dol.gov/WHD/opinion/adminIntrprtnFLSA.htm.   

For help with a specific question or a specific situation, you may contact the Wage and Hour Division’s toll-free help line at 1-866-4USWAGE (1-866-487-9243) Monday-Friday 8 a.m. to 8 p.m. Eastern Time.

Disclaimer: The information contained in this document is for information purposes only and is not meant as tax or legal advice.