Some of Your Independent Contractors Are Now Employees

Saying worker misclassification is on the rise, the Department of Labor last week issued a detailed discussion of the Fair Labor Standards Act explaining how it decides whether a worker is an employee or an independent contractor.

The Administrative Interpretation — the “Guidance” — takes such an expansive view of the FLSA’s definition of an employee that it bluntly declares, “most workers are employees under the FLSA.” The DOL Guidance doesn’t enunciate any new tests. Instead, it applies the “economic realities” test the courts have developed to determine employee status, placing heavy emphasis on whether the worker in question is “economically dependent” on the employer or is really in business for him or herself.

An analysis of the July 15 Guidance by the international law firm of Sullivan & Cromwell says, “Although neither legally binding nor particularly surprising given past pronouncements, (the Guidance) nonetheless provides clear confirmation that, from the Department’s perspective, very few workers should be classified as independent contractors.”

The DOL Guidance details each of the six factors of the legal system’s economic realities test:

  1. Is the work an integral part of the employer’s business;
  2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss;
  3. How the relative investments of the employer and worker compare;
  4. Does the work performed require special skill and initiative;
  5. Is the worker/employer relationship permanent or indefinite;
  6. What is the nature and degree of the employer’s control.

Discussing each factor in detail, the Guidance provides the Labor Department’s analysis of the legal cases, and offers examples illustrating how it will apply each element. However, the DOL cautions, “The application of the economic realities factors is guided by the overarching principle that the FLSA should be liberally construed to provide broad coverage for workers.”

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Though it doesn’t redefine any of the factors, the Guidance takes a restrictive position in their application. For instance the DOL says, “Work can be integral to a business even if the work is just one component of the business and/or is performed by hundreds or thousands of other workers.”

The actual amount of control and supervision, a previously significant test of status, is considered almost irrelevant as a guide. “An employer’s lack of control over workers is not particularly telling if the workers work from home or offsite,” says the Guidance.

“In sum,” concludes the DOL’s Administrative Interpretation, “most workers are employees under the FLSA’s broad definitions.”

John Zappe was the editor of and contributing editor of John was a newspaper reporter and editor until his geek gene lead him to launch his first website in 1994. He developed and managed online newspaper employment sites and sold advertising services to recruiters and employers. Before joining ERE Media in 2006, John was a senior consultant and analyst with Advanced Interactive Media and previously was Vice President of Digital Media for the Los Angeles Newspaper Group.