by Isabel Crosby
Over the summer the Department of Labor’s (DOL) Wage and Hour Division issued new guidance in the form of Administrator’s Interpretation Memorandum No. 2015-1 related to independent contractor misclassification. The DOL took the position that most workers are employees under the Fair Labor Standards Act (FLSA).
Employees who are misclassified as independent contractors may not receive federal or state mandated workplace protections like minimum wage; overtime compensation; workers’ compensation; health insurance and other benefits; and unemployment insurance. The cost to employers may include back pay, punitive damages and attorneys’ fees under the FLSA in addition to other potential damages and tax liabilities.
The DOL affirmed the use of the multi-factor “economic realities” test previously applied by courts in interpreting the FLSA to determine whether a worker is an employee or independent contractor. The test weighs the following six factors: (1) the extent to which the work performed is an integral part of the employer’s business; (2) the worker’s opportunity for profit or loss depending on his managerial skill; (3) the extent of the relative investments of the employer and the worker; (4) whether the work performed requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the putative employer.
Ultimately, the central focus of the “economic realities” test is whether a worker is economically dependent on the putative employer (thus rendering the worker an employee), or is really in business for himself (thus rendering the worker an independent contractor).
In considering the first factor regarding the integration of the worker within the employer’s business, if the worker generally performs work that is integral to the business of the putative employer, it is more likely than not that the worker should be classified as an employee.
The second factor relates to managerial skill and requires an analysis of whether the worker’s managerial skills affect the worker’s opportunity for profit and loss beyond the worker’s current job. Importantly, while the amount of work available from the putative employer and the worker’s ability to work additional hours may impact the amount of money the worker makes, those considerations have nothing to do with “managerial skill” and thus are not dispositive in analyzing this factor.
The third factor considers the financial investment made by the worker. Mere investment in tools and equipment may not be sufficient to tip the scale towards a determination of independent contractor status. Instead, the investment made by the worker should, according to the DOL, be significant in both nature and magnitude relative to the investment made by the putative employer in its overall business.
In analyzing the fourth factor regarding skill and initiative, the DOL cautions that the mere fact that a worker has specialized skills does not necessarily indicate that he is in business for himself, but rather requires an exhibition by the worker of business skills, judgment, and initiative such that he can establish that he is economically independent from the putative employer.
The fifth factor relates to the permanency of the relationship. Those workers who have permanent relationships with the putative employer are likely employees. However, those who lack such permanence do not necessarily meet the test for independent contractors under this factor. The lack of permanence or indefinite nature of the relationship must be the result of the worker’s own independent business initiative in order to lead to a finding of independent contractor status.
The sixth and final factor is control. Workers must have actual control over meaningful aspects of the work they perform to qualify as independent contractors. Those who simply control things such as the number of hours worked or their own schedules do not exhibit the requisite control to qualify as independent contractors under this factor.
None of these factors are dispositive. Indeed, the DOL cautions that companies should apply the “economic realities” test in a qualitative rather than quantitative way in order to answer the ultimate question of economic dependence. Ultimately, any analysis of the six factors should, according to the DOL, be guided by the principle that the FLSA should be liberally construed to provide broad coverage to all workers.
In light of the new guidance, employers should evaluate all existing independent contractor arrangements to analyze the economic realities of those relationships. In so doing, employers must also consider that tests promulgated by state and federal agencies such as the Texas Workforce Commission and the Internal Revenue Service may utilize different factors in analyzing independent contractor status.
Isabel Crosby is an associate at Andrews Kurth LLP. She can be reached at firstname.lastname@example.org.