In light of recent reports on employee classification, the Department of Labor issued a memo stating that most workers are considered employees through the broad definition of the Fair Labor Standard Act (FLSA).
On July 15, the DOL released an Administrator’s Interpretation (No. 2015-1) regarding the factors that determine how to classify an employee or independent contractor. The DOL’s Wage and Hour Division (WHD) continues to receive numerous complaints from workers who claim they are misclassified, especially as more states are addressing these issues locally with increased investigations and stricter penalties.
Companies who misclassify employees often do so with the intent to avoid paying workers minimum wage, overtime, taxes, unemployment, and healthcare and other benefits. While some companies may inadvertently classify a worker as an independent contractor, most are doing so deliberately.
In his 15-page memo, WHD Administrator David Weil clarifies the DOL’s distinction of employer and independent contractor as determined by a multi-faceted “economic realities” test. The DOL uses this test to determine if a worker is self-employed or economically dependent on the employer, in contrast to a common law control test, which “analyzes whether a worker is an employee based on the employer’s control over the worker.”
Six factors make up the economic realities test:
1. Is the work an integral part of the employer’s business?
If the worker plays an important role in the business, then he or she is more likely to be an employee than an independent contractor. For instance, the memo noted a carpenter who frames homes plays an integral role in the employer’s business, as compared to the software developer who custom made a project management program for the contractor. In this case, the software developer is probably an independent contractor, and the carpenter is more likely to be an employee of the company.
2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
An independent contractor relies on a variety of managerial skills in order to make a profit or loss on job. Furthermore, these managerial skills can either lead to additional work with opportunities where he or she can make profit or loss or reduce the opportunity for future work. An employee who has no managerial say on a job that affects how much money he or she earns is probably an employee. Outside of working more hours, an employee really has no say in how much additional money he or she can earn.
3. How does the worker’s relative investment compare to the employer’s investment?
Weil states that independent contractors often make purchases or investments that support a business as a business beyond any particular job. If they undertake some potential risk for a loss, they are more likely to be an independent contractor. On the other hand, an employee can make a purchase, but if the investment is not significant (such as a tool or piece of safety gear to perform a job), then they are less likely to be an independent contractor.
4. Does the work performed require special skill and initiative?
Having a special skill does not necessarily make a worker an independent contractor. Weil, once again, used the carpenter as example: If a carpenter, who is trained and has special skills does not make decisions – such as where the work should be done, what materials to order, or which job to bid on – but is only told to what work to perform and where, then he or she is probably an employee. However, if a carpenter builds custom-built cabinets for a number of contractors, orders the materials, decides which order to fill and in what order, then this person is probably an independent contractor.
5. Is the relationship between the worker and the employer indefinite?
If a worker has a permanent or indefinite relationship with just one employer, then that worker is probably an employee. An independent contractor will typically work for multiple clients with little restrictions on who they can work for or the equipment used and has the ability to turn down offers of business.
6. What is the nature and degree of the employer’s control?
Weil pointed out that the last question or factor should not be judged differently than the other factors. Control, he says, is one of six equal factors to make the determination. If the worker is economically dependent on the employer, then that individual could be considered an employee. A worker who is not economically dependent on a particular business – and has control over significant business decisions or meaningful aspects of work performed – could be considered an independent contractor. Factors such as work hours, schedule flexibility and dress codes do not come under consideration in this particular test.
The memo concludes with Weil stating that under the FLSA’s broad definitions, most workers are employees. “The very broad definition of employment under the FLSA as ‘to suffer or permit to work’ and the Act’s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor,” he writes. Each of the six factors must be considered equally, not analyzed mechanically or in a vacuum.