Summary
“Most workers are employees under the FLSA [federal wage and hour law],” the Department of Labor asserted last week in Guidance discussing what it described as the “problematic trend” of misclassifying workers as independent contractors. The DOL noted that while some businesses intentionally misclassify workers to cut costs, many employers inaccurately classify workers as independent contractors because they may not understand that the Fair Labor Standards Act’s definition of “employ” is extremely broad. The purpose of the Guidance, the DOL stated, is to explain how employers are to apply the standards for determining whether a worker is an employee or independent contractor under the FLSA. While the Guidance is not controlling, the DOL’s intentions are clear – to bring more workers under the protection of the FLSA through enhanced employer compliance.
In setting the stage for its ultimate pronouncement that most workers are employees, the DOL stressed that misclassification adversely impacts everyone. (See Administrator’s Interpretation No. 2015-1: The Application of the Fair Labor Standards Act’s “Suffer or Permit” Standard in the Identification of Employees Who are Misclassified as Independent Contractors.) The Guidance noted that misclassified workers are unable to avail themselves of important workplace protections, such as the minimum wage, overtime compensation, unemployment insurance, and workers’ compensation; the government (and thus, the American public) loses tax revenues; and complying employers find themselves on an uneven playing field with their competitors that seek to cut costs by violating the law. The DOL noted that many states also have acknowledged this “problematic trend” and have responded through legislation and task forces. Saul Ewing previously wrote about New Jersey’s adoption of a more stringent standard for determining independent contractor status (See this January 2015 Alert). Additionally, the DOL, the Internal Revenue Service and many state enforcement agencies have joined forces in combatting misclassification through entering into memoranda of understanding for cooperative action.
While the DOL remains focused on the “economic realities” test, which is the analysis that courts apply in determining independent contractor status, the Guidance emphasizes that employer control is not determinative. Instead, the agency’s primary inquiry is the “suffer or permit to work” definition in the statute, which, the Guidance explains, is extremely broad and covers more workers as employees than would be covered if the analysis were limited to the employer’s control over the worker. This is especially true in the construction, cleaning services and health care industries, which the agency highlighted in examples throughout the memo. In addition to the FLSA, the DOL Guidance implicates other federal statutes that apply the FLSA’s definition of “employ,” such as the Family and Medical Leave Act.
The DOL’s misclassification Guidance comes shortly after the agency released its highly anticipated proposal to overhaul the FLSA’s overtime regulations. In those proposed regulations, the DOL is recommending an increase in the minimum salary threshold for exemption from the overtime requirements for certain white collar employees by more than 100 percent (an increase in the minimum annual salary from the current $23,660 to $51,440, and an increase in the highly compensated employee annual salary from $100,000 to $122,148). The implication of both this proposed rule and the misclassification Guidance is that the DOL is seeking to ensure that many more workers are covered by the minimum wage and overtime protections of the FLSA, by both severely restricting the use of independent contractors and sharply raising the minimum salary levels that exempt employees must earn to be precluded from receiving overtime pay.
Businesses should take notice of the potential implications of the DOL’s actions, and review their classifications of workers as independent contractors to ensure proper classification and compliance with the applicable laws.
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