The Department of Labor’s Wage and Hour Division has issued an “Administrator’s Interpretation” that elucidates the DOL’s views on the issue of who is an employee and who is an independent contractor under the Fair Labor Standards Act. Although technically not a legally binding statement of law, this determination is critical for analyzing wage and hour rights, FMLA leave rights, IRS reporting requirements and other employment considerations under federal law.

Ignore it at your own (expensive) peril.

Below is both a summary and a more detailed discussion of the DOL’s conclusions.

SUMMARY:

“Most workers are employees under the FLSA.”

DISCUSSION:

The DOL has decided that most workers are employees under the FLSA because the definition of “to employ” is “to suffer or permit to work.” To determine whether a worker has been suffered or permitted to work requires an evaluation of an “economic realities” test. This test consists of six factors that, when applied, determine whether the worker is “economically dependent” on the employer or is indeed in business for him or herself. Sounds reasonable, right? Wait until you try to apply the six factors test.

FACTOR 1: Is the Work Performed an Integral Part of the Employer’s Business?

The work performed is likely to be an “integral part” of an employer’s business if it relates to the employer’s core products or services.

Citing to an example from an actual case, the DOL stated that “migrant workers who harvest the pickle crop of defendant … are employees” because it “does not take much of a record to demonstrate that picking the pickles is a necessary and integral part of the pickle business. . . .”

FACTOR 2: Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?

An independent contractor relies on his or her “managerial skill” and not just job skill in performing services and therefore has the opportunity to earn a profit or a loss.

An employee, on the other hand, can typically only increase his or her earnings by working longer hours and does not face the prospect of a loss.

FACTOR 3: What is the Worker’s Relative Investment Compared to the Employer’s Investment?

The DOL places strong emphasis on a comparison of the investments of the worker and the potential employer. Indeed, even if a worker has made an investment, that investment has to be significant when compared to the investment of the purported employer, and the investment by the employer is in the entire business enterprise not just the project or division in which the worker’s specific work is being performed.

FACTOR 4: Does the Work Performed Require Special Skill and Initiative?
The DOL believes that only skilled workers who operate an independent business are independent contractors because, ultimately, it is the worker’s business skills as an independent business person, rather than his or her technical skills, that support independent contractor status.

FACTOR 5: Is the Relationship between the Worker and the Employer Permanent or Indefinite?

An ongoing “permanent” working relationship that has no specific end or deadline is indicative of an employment relationship. A worker who is in an independent business for him or herself, reasons the DOL would not want a permanent relationship because that creates dependence on the employer.

True independent contractors work one project for an employer and do not typically work continuously or repeatedly for the same employer.

FACTOR 6: What is the Nature and Degree of the Employer’s Control?

A true independent contractor controls “meaningful aspects” of the work, which in turn proves that the worker is engaged in his or her own business. We can’t wait to find out what the DOL considers “meaningful aspects”…

However, the fact that the worker and employer have a flexible work arrangement which may include working from home or hours set by the worker is not determinative because those situations are now quite common for employees.

Notice the absence of check-off boxes next to the six factors? That is intentional.

The DOL emphasized that the factors are not to be applied mechanically or in a vacuum as a check-list. Specifically, no one factor is controlling or weightier than another factor and the ultimate outcome “must be determined by a qualitative rather than a quantitative analysis.”

That clears it up, right?

The bottom line is that the DOL interpretation signals a not-so-subtle shift away from the right of control factor previously favored by courts and administrative agencies toward the consistent application of a more comprehensive test. Further, it is clear that the DOL believes that many independent contractor relationships are currently misclassified as such. Prudent employers should therefore reexamine their contractor relationships in light of these factors.