This morning, the U.S. Department of Labor (DOL) issued a memorandum providing guidance in helping employers to reduce the misclassification of employees as independent contractors. There is no change to any existing law; however, the issuance of this memorandum does emphasize the DOL’s continued focus on misclassification issues involving independent contractors.
The Fair Labor Standard Act (FLSA) has an expansive definition of who is an employee, defining employee “as any individual employed by an employer.” The FLSA then defines “employ” broadly as including “to suffer or permit to work.” The “suffer or permit” standard was specifically designed to ensure as broad of a scope of statutory coverage as possible. An employer “suffers or permits” an individual to work if, as a matter of economic reality, the individual is dependent on the entity. The multi-factor economic realities test can be used to determine if an individual is an employee or an independent contractor under the FLSA. The factors typically 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 investment 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.
Specific courts may have additional factors that they consider. No one factor is determinative. The factors should be considered in their entirety to determine if the worker is economically dependent upon the employer, and thus an employee. Further, employers must not apply the economic realities test mechanically or rigidly.
The DOL cautions that the application of the economic realities factors is guided by the overarching principle that the FLSA should be liberally construed to provide broad coverage for workers. The economic realities of the relationship, and not the label an employer gives the relationship, are determinative. Even if a worker and an employer enter into a contract or an agreement that identifies the worker as an independent contractor, it is not relevant to the analysis of the worker’s status. The DOL also emphasizes that the ultimate inquiry under the FLSA is not labels, but whether the worker is economically dependent upon the employer or truly in business for him or herself.
The DOL concluded that most workers are employees under the FLSA’s broad definitions. If you utilize independent contractors in your workplace, now is a good time to re-assess if those workers are properly classified. Improper classification is quite costly. Should a DOL or IRS audit occur and determine that your independent contractors should have been classified as employees, your business will face back employment taxes and Social Security taxes and potential administrative penalties. Additionally, if improperly classified workers worked more than 40 hours in a work week, you also could be liable for overtime pay.