Introduction

The United States Department of Labor (DOL) has fired a new salvo in its war on worker misclassification in the form of Administrator's Interpretation 2015-1, which challenges the widespread employer practice of declaring the "independence" of workers. Employers must now re-evaluate the wisdom of continuing to utilize an across-the-board categorization of workers as "independent contractors" without due regard for documenting properly the workplace boundaries of the template of information within which such a categorization must now fit.

The recently issued Interpretation, bearing the technical title "The Application of the Fair Labor Standards Act's 'Suffer or Permit' Standard in the Identification of Employees Who Are Misclassified as Independent Contractors," garnered national headlines because of its formal updating of the standard by which to determine whether workers are truly independent contractors or merely misclassified workforce dependents.

Addressing a Nationwide Problem

Employers beware: the DOL is watching. As the Interpretation's title suggests, this document was issued specifically to address what the DOL perceives to be a significant, nationwide mis-classification problem. The DOL identifies this problem as imposing unacceptable costs upon workers who are potentially deprived of minimum wage and overtime compensation, unemployment insurance and workers' compensation coverage (not to mention being deprived of matching FICA contributions). The Interpretation emphasizes the broad-based scope of this initiative.

Basic Principle: Who Qualifies as an "Independent Contractor?"

The Interpretation begins by emphasizing that this is not a "single criterion" inquiry but rather a consideration of numerous factors. It should come as no surprise that the "default" work classification will, in the eyes of the DOL, usually be "employee" rather than "independent contractor." In this regard, the Interpretation notes in passing that some employers have tried to finesse the issue by also classifying these workers misleadingly as "owners," "partners," or "limited liability company members."

Statutory Requirement

The lengthy analysis undertaken in the Interpretation begins with the statutory language of the Fair Labor Standards Act, which identifies "employ" as "to suffer or permit to work." The Interpretation states that this definition creates a broader test for determining employee status than the more traditional "control" test, i.e., whether the employer controls the worker's hours and duties in a manner that contradicts the notion of "independence" in the workplace. The Interpretation then goes on to analyze the judicially created multi-factor "economic realities" test, a test that focuses on whether the worker is economically dependent on the employer or in business for him or herself.

What is the Multi-Factor Economic Realities Test Advocated by the DOL?

The factors include:

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 or her 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 employer.

Substance Over Form

It is important for employers to remember that to the DOL, substance triumphs over form.

Therefore, under the economic realities test,

• merely placing a label on an individual worker's status will not suffice to avoid responsibility for wages or other benefits that may be due;
• having a worker sign a "waiver" of employee rights will likewise not protect the employer from such responsibility; and
• issuing an IRS Form 1099 to a worker will not affect proper classification.

The cornerstone of "employee status" under this test is "economic dependence" upon the employer. Therefore, for example, no matter what the label, if an employer requires a worker to be available more than 35 hours per week for an open-ended, indefinite period of time, this will under the Interpretation require the worker to be classified as an "employee," irrespective of how the worker is compensated for work performed.

Application of the Economic Realities Test

The Interpretation provides contrasting scenarios of work situations where the former is an example of the need to classify the worker as an "employee," whereas the latter is an example of the permissibility of classifying the worker as an "independent contractor."

In one scenario, the workplace is a construction company that frames residential homes. If it employs a carpenter, even for a short-term project, the Interpretation states that this worker is properly classified as an "employee" during such service (even if short-term) because carpenters are integral to the employer's business since the company is in business to frame homes.

By contrast, the Interpretation notes that where the same construction company enters into a contract with a software developer to create software that assists the company in tracking bids, scheduling projects, and tracking material orders, the software developer is properly classified as an "independent contractor" because he or she is performing work that is not integral to the construction company’s business.

Please note that even in this latter scenario, if it were shown that the software developer was a "captive" of the company to the point where he or she did no work for any other company, then the worker could potentially be re-classified as an "employee."

The Interpretation goes on to emphasize that under "economic realities," a worker who is guaranteed payment for work performed is viewed as not conducting an independent business which can achieve a profit or experience a loss from operations. Thus, an employer that guarantees a "profit" to a worker, no matter what, will need to classify that worker as an "employee." Similarly, according to the Interpretation, even a requirement by an employer that a worker purchase and furnish his or her own tools to perform work assignments will not suffice to avoid a classification of "employee" where the relative investment required is not significant in light of the nature of the work assigned.

What Constitutes Control?

Finally, under the rubric of "control," a worker's absence from a particular worksite is not conclusive proof of "independence," particularly where the worker works from home or "offsite." Control over one's hours of work will not aid an employer in avoiding a worker's classification as an "employee" because, as one court put it, "an employer does not need to look over his workers' shoulders every day in order to exercise control." The concept of "control" is therefore not only diminished because it is not a determinative characteristic, but also because the existence of "control" does not even weigh in favor of "independent contractor" status unless other circumstances support the true existence of "independence."

Conclusion

The overriding message from the Interpretation is for employers to exercise significant caution in the use of "independent contractor" (or similar "label-based" classifications). The consequences of mis-classification can be financially significant for employers. Employers are therefore well-advised to confer with counsel to ensure proper documentation of the classification process to avoid the pitfalls of an unintended violation of federal wage and hour laws.