Department of Labor: Most Workers Classified As Independent Contractors Are Employees

On July 15, 2015, the Wage and Hour Division of the Department of Labor declared that most workers who are classified as independent contractors are actually employees and cited the erroneous designation of employees as independent contractors to be “one of the most serious problems” at workplaces in the United States. The DOL issued an “Administrator’s Interpretation” that it will utilize to combat this issue. In support, DOL emphasized that problems and complaints involving minimum wage, overtime compensation, unemployment insurance, and workers’ compensation have increased significantly in light of the misclassification of workers.

Initially, the Interpretation focused on the FLSA’s definition of “employ,” which “includes to suffer or permit to work.” The Interpretation stressed the wide range and importance of the term “suffer or permit” and emphasized that the analysis of whether a worker is an employee or independent contractor must be guided by the overarching principle that the scope of employment is extraordinarily broad under the FLSA. The significance here is that the DOL will start its analysis with a presumption in favor of finding that independent contractors are misclassified.

Next, the Interpretation addressed the “economic realities” test. While acknowledging that whether a worker is economically dependent on the employer (therefore an employee) or truly in business for him or herself (therefore an independent contractor) is the crucial inquiry under the FLSA, the Interpretation maintained that the multi-factorial “economic realities” test provides key guidance in reaching this ultimate determination. Thus, the DOL will strictly interpret the six (6) requirements of the economic realities test in such a manner as to make it very difficult to properly classify workers as independent contractors.

The DOL’s position that the factors of the “economic realities” test should be strictly applied in light of the expansive reach of employment under the FLSA leaves businesses with great difficulty in classifying workers as independent contractors. Businesses who continue to classify workers as independent contractors will be open to increased litigation and enforcement initiatives with inconsistent results. Employers are well advised to review the status of all independent contractors under this more restrictive analysis.

For a more detailed summary, please read Akerman’s Practice Update regarding the Administrator’s Interpretation.