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DOL Releases Guidance Indicating That Independent Contractor Classification is Restricted to a Narrow Class of Workers

The DOL is at it again.  First it was the highly-anticipated release of the proposed overtime rules a few weeks ago, and now the Department’s Wage and Hour Division has issued an “Administrator’s Interpretation” – its first of the year – clarifying the Department’s views on the appropriate analysis for classifying workers as employees or independent contractors.  Care to venture a guess as to whether the Department raised or lowered the burden on employers that utilize independent contractors?

Yup, we're sure you guessed correctly. According to the guidance, employers face an uphill battle in classifying a worker as an independent contractor, because, in the Department’s view, the Fair Labor Standards Act defines “employee” so broadly that such a classification should only be reserved for a narrow subset of workers.

The guidance tells employers to apply a six-factor “economic realities” test with an emphasis on the FLSA’s broad definition of employment and a focus on whether the employee is economically dependent on the employer as opposed to being in business for him or herself.  Employers should not apply this test mechanically or in a vacuum and no one factor is controlling or should be given undue weight, including the degree of control an employer exercises over a worker - which is a factor courts have typically focused on over several of the other factors.

The Administrator's Interpretation seeks to further the goals of a broader “Misclassification Initiative” dating back to 2011, in which the DOL and IRS agreed to collaborate with various state agencies to reduce misclassification, fraudulent filings and abusive employment and unemployment tax schemes.  The Administrator’s Interpretation explains that in view of the FLSA’s broad construction of the term “employ,” which the statute defines as “suffer or permit to work,” “most workers are employees under the FLSA.”

The WHD determined that the six economic reality factors generally “should not be applied as a checklist, but rather the outcome must be determined by a qualitative rather than a quantitative analysis.” The WHD also explained that independent contractors are “those workers with economic independence who are operating a business of their own.  On the other hand, workers who are economically dependent on the employer, regardless of skill level, are employees covered by the FLSA.”  The guidance also provides several hypotheticals for employers to utilize when they run their own classification analyses.

As we noted in a previous post, because this guidance is not subject to notice and public comment it does not carry the “force and effect of law.”  However, employers are well-advised to comply with the guidance of agencies charged with enforcing federal statutes.  Moreover, the new standard applies equally when determining whether to classify an individual as an employee or independent contractor for purposes of the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act.  Finally, employers should be mindful of the fact that in addition to complying with the WHD’s more stringent standard for assessing independent contractor status, they need to keep abreast of variations of this independent contractor classification test that the IRS, state labor commissioners and state workers’ compensation and unemployment insurance agencies have established.

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George Patterson