United States Department of Labor Intensifies Focus on Independent Contractor Classifications with New Administrator’s Interpretation

Last month, the United States Department of Labor issued Administrator’s Interpretation No. 2015-1, regarding “The Application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who Are Misclassified as Independent Contractors.”  While the Interpretation does not represent a change in the law, it is certainly an indication that the DOL has established a renewed focus on employers’ use of independent contractors in their business models.  And because the Interpretation is clear that the guidance it provides may be used in FMLA, as well as FLSA, cases, the DOL and plaintiffs in misclassification lawsuits may cite to it in a large variety of employment litigation matters in the future.

The Interpretation essentially solidifies the wide-angle lens through which the DOL will review and find the presence of employment relationships.  In fact, Administrator Weil stated frankly that “most workers are employees under the FLSA.”  This blunt viewpoint appears to be the DOL’s encouragement to employers to take a serious look at the classification of their independent contractors and be aware that those workers may actually be “employees.”

At its core, the Interpretation discusses the proper application of the FLSA’s definition of “employ,” which is “to suffer or permit to work.”  (citing 29 U.S.C. § 203(g).)  This definition requires the application of the multi-factor “economic realities” test.  Although that application is not really a change in the agency’s position on the definition, the agency is reinforcing the idea that the definition of “employ” is an especially broad one.

Specifically, the DOL sought to clarify that no one factor is the focal point of the review—particularly, the “control” factor.  The factors in the “economic realities” test “typically” include:

(A) the extent to which the work performed is an integral part of the employer’s business; (B) the worker’s opportunity for profit or loss depending on his or her managerial skill; (C) the extent of the relative investments of the employer and the worker; (D) whether the work performed requires special skills and initiative; (E) the permanency of the relationship; and (F) the degree of control exercised or retained by the employer.

But as the Interpretation recognizes, courts do not always stick to this list and may add to it, depending on the circumstances.  This flexible approach makes it particularly difficult for employers to determine, with confidence, that a worker or group of workers are “independent contractors” and not employees.

Regardless of the precise list of factors utilized, the Interpretation advises that these factors should not serve as a “checklist” in a “quantitative” analysis.  Rather, the DOL urges a “qualitative” approach, where the factors should be weighed against and compared to each other to determine whether a worker is “economically dependent on the employer.”  At the end of the analysis, if the worker is dependent, the worker is an employee.    This contrasts the common law “control test,” which some courts and government agencies still use in tax-related issues, where factors in favor and against one classification or another are added up to arrive at a decision on the proper classification.

While an Administrator’s Interpretation is not the law, courts can, and likely will, use it to find more and more workers to be “employees,” rather than “independent contractors.”  Employers should therefore be aware of this newly intensified focus. And they should carefully assess their classifications of workers as “independent contractors.”