Employee classification issues have been a recurrent topic of ours, and with all the class action litigation arising from independent contractor and other classifications, we have had no shortage of opportunities to remind companies of the potential risks inherent in other-than-employee classifications. But just in case anyone in the business community has not heeded these warnings, the Department of Labor has just upped the ante on misclassification challenges, sending a shot across the bow of any business using or considering the use of independent contractors to meet its manpower needs.
In a 15-page “administrator’s interpretation” memorandum issued on July 15, 2015 by Wage and Hour Division Administrator David Weil, the DOL asserts that most workers are legally employees under the Fair Labor Standards Act (FLSA), emphasizing an expansive interpretation of the “suffer or permitted to work” language that defines employment under in the FLSA. In line with this assertion, Weil’s bulletin claims the vast majority of workers classified as independent contractors are invalidly classified and the companies engaging their services are violating the law. The key analysis, according to the bulletin, is an “economic realities test” asking whether a worker is genuinely in business for himself or herself (making him or her a genuine independent contractor) or is economically dependent on the company engaging him or her for work (making him or her an employee). Businesses coming down on the wrong side of this analysis face significant potential liabilities for failure to meet federal or state minimum wage requirements and overtime standards, and, on a state-by-state basis, failure to provide breaks, provide workers’ compensation insurance, and/or pay various taxes for things like unemployment benefits.
In some respects, Weil’s bulletin arguably does not create anything new in that courts have relied upon an “economic realities” test to assess independent contractor classifications, and the bulletin cites to a number of these cases. However, and perhaps more accurately stated, the interpretation cobbles together quotations from various cases to support its expansive application of “economic realities” to the FLSA’s “suffer or permitted to work” language. The memo gives an aggressive reading to the cases upon which it relies (most of which rely on facts where the legitimacy of the classification was not particularly murky) to take aim at classifications falling much more into grey areas.
Weil left little uncertainty about the intent behind the memo in an interview he granted Law360 the same day the DOL issued it. Even as he claimed his bulletin does not articulate new policy or change the interpretive standards used by the DOL, the memo emphasizes an expansive application of the term “employee,” particularly in its suggestion that a worker must be economically independent from a company to validly qualify as an independent contractor. Additionally, while he claimed he issued the guidance primarily in response to employer requests for assistance in understanding classification questions, Weil made clear cracking down on independent contractor classifications has been a priority of the Administration and that “ we feel strongly that to really also deal with misclassification we have to make it very clear to businesses what we mean.” Weil also suggested the guidance should be viewed as “fair notice that we intend to use the enforcement tools.” Adding weight to this conclusion, Weil’s bulletin also states the DOL will coordinate with the Internal Revenue Service to identify suspected violators of its interpretation of classification standards and investigate them. It also bears mentioning that in its recent annual budget request, the DOL asked for approximately $32 million to hire 300 new full-time enforcement officers and support staff.
Though the bulletin has no formal force of law behind it and may ultimately be ignored by courts, Weil’s “interpretation” cements the point that the DOL, at least in the current political climate, will be extremely skeptical of non-employee classifications. Additionally, though reasonable minds may differ as to whether the “administrator’s interpretation” adds anything new to the legal landscape, it is not a stretch to say the DOL has made a formal declaration of war on independent contractor or consultant classifications. Businesses should brace for more scrutiny on such classifications and be aware that, if confronted with a government audit or inquiry regarding worker classifications, they will have a tremendously uphill battle. Companies should also expect new and more private litigation over independent contractor classifications to result and worker attorneys to argue to courts that they now have the full weight of the government’s authority behind them.