• DOL Issues Guidance on Independent Contractor Status
  • August 10, 2015
  • Law Firm: Shawe Rosenthal LLP - Baltimore Office
  • The Department of Labor has issued an Administrator’s Interpretation on its test for determining whether an individual is an employee, who would thereby be covered by the Fair Labor Standards Act, or an independent contractor.

    The DOL uses an economic realities test, and notes that this test is broader than the common law control test. It is also broader than other tests for independent contractor status under various state or federal laws. The economic realities test analyzes whether a worker is economically dependent on the employer, and is thus an employee, or is truly in business for himself as an independent contractor. According to the Administrator, under this test, most workers are employees.

    The FLSA defines employee as “any individual employed by an employer” and defines employ to mean “suffer or permit to work.” As described in the Administrator’s Interpretation, the following six factors are considered in determining whether a worker is economically dependent on the employer:
    1. “Is the work an integral part of the employer’s business?” If so, it is more likely that the worker is economically dependent on the employer. Work can be integral to a business even if it is just one component of the business, is performed by many others, or is performed away from the employer’s premises.
    2. “Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?” This factor does not focus on whether a worker can simply choose to work more hours, but on whether the worker exercises managerial skills that affects the opportunity for profit or loss beyond the current job (such as decisions to hire others, purchase materials and equipment, advertise, rent space, manage time tables, etc.)
    3. “How does the worker’s relative investment compare to the employer’s investment?” Under this factor, not only must the worker make some investment, but the worker’s investment must be compared to the employer’s investment. If the worker’s investment is relatively minor, that suggests the worker is economically dependent on the employer.
    4. “Does the work performed require special skill and initiative?” Under this factor, a worker’s business, not technical skills, are the focus. The DOL states that “Even specialized skills do not indicate that workers are in business for themselves, especially if those skills are technical and used to perform the work.”
    5. “Is the relationship between the worker and the employer permanent or indefinite?” If so, this suggests an employment relationship. The DOL notes, however, that the lack of permanence or indefiniteness does not automatically suggest an independent contractor relationship; the reason for the lack of permanence or indefiniteness must be reviewed to determine if it is due to “operational characteristics intrinsic to the industry” (such as the use of staffing agency workers) or the worker’s “own business initiative.”
    6. “What is the nature and degree of the employer’s control?” In order to support an independent contractor designation, the worker must actually - not theoretically - control meaningful aspects of the work being performed. An employer who determines a worker’s schedule, dress, or tasks is exercising control over the worker.
    The DOL states that no one factor - particularly control - is determinative of whether a worker is an employee. All the factors must be examined in a qualitative, not quantitative, manner in the broader context of economic dependence.

    The issue of misclassification is one of particular interest to state and federal agencies in recent years. Employers who misclassify employees as independent contractors face significant financial consequences - including the payment of taxes, insurance and retirement benefits, workers’ compensation, unemployment, and overtime wages. Thus, employers would be well-advised to consider carefully how it classifies its workers.