On July 15, 2015, the U.S. Department of Labor (“DOL”) issued an Administrator’s Interpretation that purports to clarify on one of the most challenging legal questions facing employers today: are certain workers employees or independent contractors? Notably absent from the guidance, however, is any specific reference to workers who provide services through “on-demand” companies like Uber, Lyft, and Airbnb who use technology to deliver traditional services more efficiently by connecting consumers directly with service providers. This is surprising since it seems that the DOL’s renewed focus on misclassification has stemmed in large part from the slew of pending on-demand worker lawsuits in which the classification tests have proven very difficult to apply.
That said, the DOL left no doubt that it is taking a hard stance on misclassification of workers in all industries. The DOL seizes upon the definition of “employ” under the Fair Labor Standards Act (“FLSA”)—“to suffer or permit to work”—and concludes that “most workers are employees under the FLSA.” The Administrator’s Interpretation is effective immediately, without any notice and comment period, which raises serious questions as to whether any court should adopt the Interpretation. But at least for now, the guidance provides more insight into how the DOL will analyze worker classification, and any entity that engages independent contractors should take notice.
At first blush, the guidance sounds remarkably familiar to efforts we’ve seen recently in California to broaden the definition of employee using the “suffer or permit to work” standard. In Dynamex Operations West v. Superior Court, the California Supreme Court is scheduled to review a California appellate court’s decision that concludes that any business that “suffers or permits” a worker to provide services is an employee. The appellate court concluded that the suffer-or-permit standard merely requires showing that the company either: (1) knew or should have known that the contractors were provided services; or (2) had the authority to negotiate the amount it would pay the contractors for their services. Critically (and erroneously) the appellate court abandoned all other tests of employment in favor of this overbroad standard, which originally arose from the child labor laws and was designed to determine whether two entities are joint employers, not whether an individual is an employee or a contractor.
Fortunately, the DOL stops short of taking the “suffer or permit” standard that far. But its decision to tie the “suffer or permit” standard to the economic realities test, which has been the standard for employee classification under the FLSA for decades, is troubling. According to the guidance, “an entity ‘suffers or permits’ an individual to work if, as a matter of economic reality, the individual is dependent on the entity.” This is not simply a matter of the entity knowing that the worker is providing services or having the authority to negotiate pay (the standard before the California Supreme Court in Dynamex). Rather, the DOL crafts the key question as whether the worker is truly in business for himself (i.e., an independent contractor) or whether, as a matter of economic reality, the worker is economically dependent on the company (i.e., an employee). To make this determination, courts have historically relied on the following six factors:
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the extent to which the work performed is an integral part of the company’s business;
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the worker’s opportunity for profit or loss depending on his or her own managerial skill;
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the extent of the relative investments of the company and worker;
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whether the work requires special skills and initiative;
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the permanency of the relationship between the company and worker; and
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the degree of control exercised by the company.
The Administrator acknowledges the flexibility in the test, noting that these factors should not be “analyzed mechanically or in a vacuum, and no single factor, including control, should be over-emphasized.” Some might prefer the predictability of a more rigid test, but this fluidity arguably allows the test to adapt over time, which is critical in such a rapidly changing economy. It also makes it harder to litigate misclassification on a class-wide basis if the degree to which any given worker meets each factor differs from individual to individual.
The bulk of the Administrator’s Interpretation consists of several examples reflecting what type of work the DOL considers to be employment versus the work of a contractor, as summarized in the chart below.
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Factor |
Explanation |
Examples |
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1. Is the Work an Integral Part of the Employer’s Business? |
If the work performed by the worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer. Work can be integral to a business even if the work is just one component of the business, is performed by other workers, or is performed away from the employer’s premises. |
Indicia of Independent Contractor
Software developer creating software to help construction company track bids, schedule projects, etc.Indicia of Employee
Carpenters working for construction company that frames residential homes. |
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2. Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss? |
A worker’s decision to hire others, purchase materials and equipment, advertise, rent space and manage time tables may reflect managerial skills that will affect his opportunity for profit or loss. The worker’s ability to perform well, work more hours, and how much work is available do not. |
Indicia of Independent ContractorWorker provides cleaning services for corporate clients, produces advertising, negotiates contracts, decides which jobs to perform and when, hires helpers, recruits new clients.Indicia of EmployeeWorker provides cleaning services for corporate clients, performing assignments only as determined and scheduled by company, without soliciting additional work from other clients, advertising his services, endeavoring to reduce costs. |
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3. How Does the Worker’s Relative Investment Compare to the Employer’s Investment? |
Even if substantial, the worker’s investment should not be considered alone, but by comparing it to the employer’s investment. If the worker’s investment is relatively minor, that suggests the worker may be economically dependent on the employer. |
Indicia of Independent ContractorWorker provides cleaning services through referrals; buys car for exclusive business use; rents own space to store car and materials; advertises; markets services; hires own helper for larger jobs; regularly purchases and brings own material and equipment.Indicia of EmployeeWorker provides cleaning services for company that provides insurance, car, equipment and supplies, advertising; finds clients for worker providing cleaning services for cleaning company. |
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4. Does the Work Performed Require Special Skill and Initiative? |
Technical skills are not themselves indicative of independent contractor status. Work must involve special skills that are used in an independent way, such as demonstrating business-like initiative. |
Indicia of Independent ContractorHighly skilled carpenter provides specialized service for a variety of construction companies, such as custom, made-to-order handcrafted cabinets; markets services, determines when to order materials and in what quantity; determines which orders to fill.Indicia of EmployeeHighly skilled carpenter provides carpentry services for construction firm, but makes no independent judgments at the job site; does not determine sequence of work, order materials, or think about bidding next job; told what work to perform where. |
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5. Is the Relationship between the Worker and the Employer Permanent or Indefinite? |
Permanency or indefiniteness suggests an employment relationship. But worker’s lack of permanent or indefinite relationship does not automatically reflect a contractor relationship if it is due to the nature of profession instead of the worker’s independent business initiative. |
Indicia of Independent ContractorEditor has worked intermittently with 15 different publishing houses over past several years; markets to several publishing houses; negotiates rates for each job; turns down work for any reason, including if she is too busy with other editing jobs.Indicia of EmployeeEditor has worked for established publishing house for years; edits are completed based on publishing house’s specifications, using its software; only edits books provided by publishing house. |
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6. What is the Nature and Degree of the Employer’s Control? |
Proper independent contractors must control meaningful aspects of the work. Workers that work offsite or at home, and those who control their own hours or work a flexible schedule are not necessarily contractors even though they work with little direct supervision. Additionally, the nature and degree of control rather than the reason for the control is the relevant inquiry. Control exercised over a worker due to nature of the business, regulatory requirements, or desire to ensure customers are satisfied may still indicate an employment relationship. |
Indicia of Independent ContractorRegistered nurse provides skilled nursing in nursing homes and is listed with registry to be matched with clients. Registry sends nurse listing each week with potential clients; nurse is free to call as many or as few clients as she wishes and to work for as many or as few as she wishes; nurse negotiates own wage rate and schedule with client.Indicia of EmployeeRegistered nurse provides skilled nursing care in nursing homes and is listed with nurse registry to be matched with clients. Registry interviewed nurse; required nurse to do multi-day training; sends nurse listing each week with potential clients; requires nurse to fill out form prior to contacting clients; requires nurse to adhere to wage range; nurse cannot provide care during weekend hours; nurse must inform registry if hired by a client and must notify registry if she will miss scheduled work. |
Time will tell whether courts choose to adopt the Administrator’s unilateral interpretation of these standards, but in the meantime, businesses should analyze these examples carefully when evaluating the classification of its workers. Of course, the examples provided by the Administrator are not exhaustive and still leave many questions unanswered. A proper analysis of worker classification should look carefully at the facts specific to each case, should address the various state laws and local ordinances that may also apply, and should be conducted with legal counsel to preserve the attorney client privilege.
