October 1, 2015
In July, the U.S. Department of Labor Wage and Hour Administrator issued an Administrative Interpretation (the “Guidance”) clarifying the standards it applies to determine whether a worker is properly classified as an employee or an independent contractor. In so doing – and of particular note to employers – the DOL advised that “most workers are employees” pursuant to the federal Fair Labor Standards Act (FLSA).
In reaching this conclusion, the Guidance stressed that the definitions of “employ” and “employee” under the FLSA are very broad, and the DOL specifically identifies the “economic realities test” as the appropriate analysis to make the determination of employee or independent contractor status.
The DOL described the six factors that employers must consider in determining a worker’s independent contractor status pursuant to the economic realities test as follows:
1. Whether the work is an integral part of the employer’s business;
2. Whether the worker’s managerial skill affects his or her opportunity for profit or loss;
3. The relative investments of the employer and worker;
4. Whether the work requires special skill and initiative;
5. Whether the relationship between the employer and worker is permanent or indefinite; and
6. The nature and degree of the employer’s control over the worker.
While the Guidance emphasizes that each of these factors must be considered when making a determination, the DOL goes out of its way to note that the nature and degree of the employer’s control over the worker should not be overvalued. This caution highlights that the DOL has rejected the common law “control test” adopted by some courts. The Guidance instructs that the ultimate inquiry pursuant to the economic realities test is whether the worker is “economically dependent on the employer or truly in business for him or herself.”
Employers who use independent contractors are wise to carefully review those relationships. Such review should focus on the six factors listed as they relate to the actual practices between the employer and the contractor. Employers should also keep in mind that while a written independent contractor agreement may weigh in favor of a contractor relationship, the written agreement is given much less import than the actual actions taken by the parties.