By Kelline R. Linton,
The Department of Labor (“DOL”) issued guidance today that clarified the independent contractor versus employee issue. The 15-page memorandum advised that most workers qualify as employees under the Fair Labor Standards Act’s (“FLSA”) expansive definition of employment, which defines employment as “to suffer or permit to work.”
Courts use the “economic realities” test to determine whether a worker is an employee or independent contractor under the FLSA. The DOL stressed that this test provides a broader scope of employment than the common law control test. The “economic realities” test determines whether a worker is economically dependent on the employer or in business for him or herself. The DOL concluded that a worker who is economically dependent is an employee under the FLSA. For this reason, the DOL explained most workers are employees under the FLSA.
The “economic realities” test typically utilizes six factors: (1) the extent to which the work performed is an integral part of the employer’s business; (2) the worker’s opportunity for profit or loss depending on his or her managerial skill; (3) the extent of the relative investments of the employer and the worker; (4) whether the work performed requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer. The DOL explained that employers should not over-emphasize any one factor, including control, but rather should consider each factor in light of the ultimate determination—whether the worker is really in business for him or herself or is economically dependent on the employer.
How does this impact an employer? Misclassification is currently a hot topic for the DOL. Furthermore, misclassification can cause substantial monetary damage under the FLSA. We advise that companies take advantage of the DOL’s newly issued guidance that provides detailed examples and clarifications for the “economic realities” test. The DOL believes that most independent contractor workers are misclassified, so we encourage companies to review their independent contractors sooner rather than later to ensure proper classification.
To read the entire DOL memorandum, please visit: http://www.employmentandlaborinsider.com/wp-content/uploads/sites/328/2015/07/7.15.15.WHD-Administrators-Interpretation-on-Misclassification.pdf.