DOL: Most Workers are Employees, Not Independent Contractors

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DOL: Most Workers are Employees, Not Independent Contractors

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Two weeks after publishing proposed new rules to update the white collar exemptions of the Fair Labor Standards Act (FLSA), yesterday the United States Department of Labor (DOL) issued a 15-page Administrator’s Interpretation concluding that “most workers” are employees, as opposed to independent contractors, under the FLSA. (A copy of the guidance can be found here) Although this guidance does not change current law or regulations but rather is intended to provide clarity on the proper classification of workers, employers who utilize independent contractors should view it as further evidence of the aggressive stance the DOL is taking on this issue.

With the stated goals of “helping the regulated community” and “curtailing misclassification,” this guidance demonstrates the DOL’s continued focus on worker misclassification. Indeed, as noted in the guidance, the DOL is pursuing misclassification enforcement actions against employers and has entered into memoranda of understanding with numerous states and the Internal Revenue Service to share information to coordinate enforcement efforts on worker misclassification.

According to the DOL, the proper standard for identifying the classification of a worker as an employee or independent contractor under the FLSA is based on the economic realities of the relationship — that is, the degree to which the employee is economically dependent upon the employer. Stressing the broad definition of “employ” in the FLSA, which includes to “suffer or permit to work,” the DOL emphasizes that the economic realities test — as opposed to the more narrow common law control test that Congress rejected when it drafted the FLSA — governs.

The DOL also describes numerous factors that can determine whether the individual is economically dependent upon the entity, while noting that no single factor is determinative and that their application must be flexible and guided by the “overarching principle” favoring broad coverage for workers. The factors include:

  • the extent to which the work performed is an integral part of the business;
  • whether the worker has the ability to make decisions and use his or her managerial skill to affect opportunity for profit or loss (as opposed to, for instance, fluctuating earnings based on work available);
  • the extent of the relative investments of the employer and worker;
  • whether the work performed requires special skills, judgment, and initiative;
  •  the permanency and/or indefiniteness of the relationship; and
  • the degree to which the worker controls aspects of the work performed.

According to the DOL, no factor, including but not limited to the control factor, should be given undue weight. Rather, they should be considered in totality to determine whether a worker is economically dependent on an employer, and thus an employee.

This guidance comes on the heels of the DOL’s July 6, 2015, publication of its notice of proposed rulemaking to update the FLSA’s exemptions for executive, administrative, professional, outside sales, and computer employees (White Collar Exemptions). As employers well know, the minimum salary basis required under the White Collar Exemptions is currently $455 per week. Provided that employees meet this salary basis and satisfy the applicable duties test, they can be treated as exempt from the minimum wage and overtime pay protections of the FLSA. In its proposed rule change, however, the DOL seeks to set the minimum salary required for application of the White Collar Exemptions at the 40th percentile of weekly earnings for full-time employees (representing an increase from $455 to $921 per week, although the DOL projects that by the time the final rule is issued in 2016, this amount will increase to $970 per week). According to the DOL, an estimated 4.6 million workers who are exempt under the current regulations will become newly entitled to overtime pay protection under the FLSA within the first year of the adoption of the proposed rule change.

The proposed rule change also seeks to set the minimum compensation required for application of the “Highly Compensated Employee Exemption” at the 90th percentile of earnings for full-time employees (representing an increase from $100,000 to $122,148 per year) and proposes a mechanism for annually and automatically updating the minimum salary and compensation levels for the exemptions going forward. Interested members of the public have until September 4, 2015 to submit written comments regarding the rule.

Please contact any member of our Labor and Employment Group if you have questions about the DOL’s new guidance or the proposed rule.