Thursday, July 16, 2015

DOL Updates Standard for Determination of Employees and Independent Contractors - There Will Be More Employees and Fewer ICs

On July 15, the Department of Labor issued 15 pages of new guidance on how businesses should distinguish between employees and independent contractors, noting misclassification of employees has been on the rise throughout the country.  The DOL’s Wage and Hour Division now recommends that employers incorporate economic realities when determining how to classify a worker, including the company’s degree of control over the person.  The effect of this is to classify more workers as employees and less as independent contractors. The guidance provides, in part: 
... Unlike the common law control test, which analyzes whether a worker is an employee based on the employer’s control over the worker and not the broader economic realities of the working relationship, the “suffer or permit” standard broadens the scope of employment relationships covered by the FLSA. Indeed, the FLSA’s statutory definitions (including “suffer or permit”) rejected the common law control test that was prevalent at the time. As the Supreme Court explained:
[I]n determining who are “employees” under the Act, common law employee categories or employer-employee classifications under other statutes are not of controlling significance. This Act contains its own definitions, comprehensive enough to require its application to many persons and working relationships, which prior to this Act, were not deemed to fall within an employer-employee category. ...
An “entity ‘suffers or permits’ an individual to work if, as a matter of economic reality, the individual is dependent on the entity.” Antenor, 88 F.3d at 929. The Supreme Court and Circuit Courts of Appeals have developed a multi-factor “economic realities” test to determine whether a worker is an employee or an independent contractor under the FLSA. See, e.g., Tony & Susan Alamo, 471 U.S. at 301 (noting that the test of employment under the FLSA is economic reality); Goldberg v. Whitaker House Co-op, Inc., 366 U.S. 28, 33 (1961) (the economic realities of the worker’s relationship with the employer control, rather than any technical concepts used to characterize that relationship). The factors typically include: 
  • (A) the extent to which the work performed is an integral part of the employer’s business; 
  • (B) the worker’s opportunity for profit or loss depending on his or her managerial skill; 
  • (C) the extent of the relative investments of the employer and the worker; 
  • (D) whether the work performed requires special skills and initiative; 
  • (E) the permanency of the relationship; and 
  • (F) the degree of control exercised or retained by the employer. 
In undertaking this analysis, each factor is examined and analyzed in relation to one another, and no single factor is determinative. The “control” factor, for example, should not be given undue weight. The factors should be considered in totality to determine whether a worker is economically dependent on the employer, and thus an employee. The factors should not be applied as a checklist, but rather the outcome must be determined by a qualitative rather than a quantitative analysis. 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, as evidenced by the Act’s defining “employ” as “to suffer or permit to work.” ...