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Labor & Employment Alert >> Department of Labor Issues Guidance on Misclassification of Employees as Independent Contractors

July 23, 2015

On July 15, 2015, the U.S. Department of Labor (DOL) issued guidance regarding the misclassification of employees under the Fair Labor Standards Act (FLSA) as independent contractors. In the guidance, the DOL highlights its continued focus on curbing what it believes is the improper classification of workers as independent contractors.

What The Guidance Says
The DOL’s guidance emphasizes the following key points:

  • Under the FLSA, “employee” is broadly defined. The definition of “employee” in the FLSA is specifically designed to ensure as broad a scope of statutory coverage as possible. The “common law control test,” which focuses only on whether the employee is “controlled” by the employer, does not apply to the definition of “employee” under the FLSA.
  • The “economic realities” factors apply. The six-part “economic realities” test serves as a roadmap for determining whether an employment relationship exists. In determining whether an individual is an employee or independent contractor, courts generally look to the following factors (which must all be considered in their totality):

    • The extent to which the work performed is an integral part of the employer’s business;
    • The worker’s opportunity for profit or loss depending on his or her managerial skill;
    • The extent of the relative investments of the employer and the worker;
    • Whether the work performed requires special skills and initiative;
    • The permanence of the relationship; and
    • The degree of control exercised or retained by the employer.
  • The ultimate question for the employer. The ultimate inquiry, according to the DOL, is whether the worker is economically dependent on the employer or truly in business for him or herself. If the worker is economically dependent on the employer, then the worker is an employee. If the worker is in business for him or herself, then the worker is an independent contractor.

The Bottom Line

While the DOL’s guidance is not a formal rule and is not binding, it represents the latest effort to deal with what DOL Wage and Hour Division Administrator David Weil has called the “growing problem” of misclassification. Employers should keep this guidance in mind and consult counsel when making decisions about the classification of certain workers. Decisions about classification will be impacted by several relevant factors, including the company’s business, the type of work being performed, and the extent to which the worker provides services to other companies.