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September 14, 2015

The United States Department of Labor Issues Guidance on Classification of Workers as Independent Contractors or Employees

Effective July 15, 2015, the United States Department of Labor ("USDOL") issued an Administrator's Interpretation regarding the definition of "employ" to guide the determination of whether a worker is an independent contractor under the Fair Labor Standards Act ("FLSA"). The USDOL currently works with the Internal Revenue Service and 22 states (including New York) to prevent the misclassification of employees as independent contractors.

The FLSA's definition of the scope of "employment" is the broadest definition included in any one law. As a result, the USDOL considers most workers to be employees under the FLSA's broad definitions.

The FLSA defines "employ" to include "to suffer or permit to work." The administrator's interpretation analyzes how this definition guides the FLSA's determination of whether a worker is an employee or an independent contractor under the FLSA. The USDOL states that whether a worker is an employee under the FLSA is a legal question determined by the economic realities of the working relationship between the employer and the worker.

The ultimate inquiry is whether the worker is economically dependent on the employer or truly in business for him or herself. The worker is an employee if he or she is economically dependent on the employer. The worker is an independent contractor if he or she is in business for him or herself. The worker is in business for him or herself if he or she is economically independent from the employer.

The Supreme Court and the 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, which the USDOL relies upon in its Administrative Interpretation. The "economic realities" test includes the following factors:

  1. The extent to which the work performed is an integral part of the employer's business.
    According to the USDOL, work can be integral to a business even if the work is just one component of the business or if it is performed by hundreds or thousands of other workers. Work can also be integral even if it is performed away from the employer's premises, such as at the worker's home, or on the premises of the employer's customers.
  2. The worker's opportunity for profit or loss depending on his or her managerial skill.
    An independent contractor exercises managerial skills that affect his or her opportunity for increased profit or loss beyond the current job. The USDOL states that "decisions to hire others, purchase materials and equipment, advertise, rent space, and manage time tables" may be reflective of such managerial skills. In contrast, a worker's ability to work more hours is not a managerial skill that affects the opportunity for profit or loss.
  3. The extent of the relative investments of the employer and the worker.
    A worker should make significant investment, and undertake some risk for a loss, to indicate that he or she is an independent business. An independent contractor typically makes investments that support his or her business to further its capacity to expand, reduce its cost structure, or extend the reach of its market. However, the USDOL suggests that a worker's investment must also be compared to the employer's investment. As an independent contractor, the worker's investment should not be relatively minor compared with that of the employer.
  4. Whether the work performed requires special skills and initiative.
    A worker's skills, even specialized skills, are not in itself indicative of independent contractor status, especially if those skills are technical and used to perform the work. Relying on a worker's technical skills to claim independent contractor status overlooks whether he or she is exercising business skills, judgment, or initiative.
  5. The permanency of the relationship between the employer and the worker.
    The permanence or indefiniteness of a worker's relationship with an employer suggests that the worker is an employee. However, a lack of permanency or indefiniteness in the relationship does not automatically suggest that the worker is an independent contractor. Instead the USDOL will review the reason for the lack of permanence or indefiniteness to determine whether the lack of permanence or indefiniteness is due to "operational characteristics intrinsic to the industry" or the worker's own independent business initiative.
  6. The degree of control exercised or retained by the employer.
    The worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business. Some employers claim that they exercise control over workers due to the nature of their business, regulatory requirements, or the desire to ensure that their customers are satisfied. However, the USDOL considers control exercised over a worker to indicate that the worker is an employee even if it is for the aforementioned reasons.

The USDOL does not consider any one single factor as determinative of whether a worker is an employee. For example, the USDOL states that the "degree of control" factor should not be given undue weight. Instead, the factors should be analyzed in totality and in relation to one another to determine whether a worker is an employee or an independent contractor.

Importantly, the USDOL affords no weight in this determination to any job title, label or agreement between the parties that designates a worker as an independent contractor.

While the Administrator's Interpretation guides the USDOL's approach on enforcement, please remember that the Administrator's Interpretation is neither law or a regulation. Nonetheless, employers that use independent contractors should examine their independent contractor relationships to determine if the relationships would stand under the Administrative Interpretation.

If you have any questions about the content of this alert please contact the Barclay Damon attorney with whom you normally work or any attorney in our Labor & Employment Practice Area.


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