On July 15, 2015, the Department of Labor issued an Administrator’s Interpretation asserting that most independent contractors are actually employees under the Fair Labor Standards Act. The DOL claims that the FLSA’s broad definition of employment and “suffer to work” standard under the FLSA requires that most workers be treated as employees. The certainly appears to be the DOL’s warning shot over the bow and companies using independent contractors should take heed.
The most startling aspect of the Administrative Interpretation is the application of the economic realities test in concluding that workers who are economically dependent on the company, regardless of skill level, are employees under the FLSA’s broad definition of employee.
So, what is the Economic Realities Test? Here are the factors considered:
Is the Work an Integral Part of the Employer’s Business? Integral work is just that, important for the business. The DOL provides an example of a construction related company. And, yes, I think the DOL intentionally targeted the construction industry. For a construction company that frames residential homes, carpenters are integral to the company because the company is in the business to frame homes, and carpentry is an integral part of providing that service. But, the same construction company that contracts with a software developer to create software that assists the company in tracking bids and scheduling projects and crews, is not integral to the construction company’s business.
Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss? The worker’s managerial skill will often affect opportunity for profit or loss beyond the current job, such as by leading to additional business from other parties or by reducing the opportunity for future work. For example, a worker’s decisions to hire others, purchase materials and equipment, advertise, rent space, and manage time tables may reflect managerial skills that will affect his or her opportunity for profit or loss beyond a current job.
How Does the Worker’s Relative Investment Compare to the Employer’s Investment? Comparing the nature and extent of the investments of the employer and the worker is important in determining whether the worker is an independent contractor in business for himself. The worker should make some investment (and therefore undertake at least some risk for a loss) in order for there to be an indication that he or she is an independent business. An independent contractor typically makes investments that support a business as a business beyond any particular job. The investment of a true independent contractor might, for example, further the business’s capacity to expand, reduce its cost structure, or extend the reach of the independent contractor’s market.
Does the Work Performed Require Special Skill and Initiative? A worker’s business skills, judgment, and initiative, not his technical skills, will aid in determining whether the worker is economically independent. Again with the construction example, a highly skilled carpenter who provides a specialized service for a variety of area construction companies, for example, custom, handcrafted cabinets that are made-to-order, may be demonstrating the skill and initiative of an independent contractor if the carpenter markets his services, determines when to order materials and the quantity of materials to order, and determines which orders to fill.
Is the Relationship between the Worker and the Employer Permanent or Indefinite? Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee.
What is the Nature and Degree of the Employer’s Control? The employer’s control should be analyzed in light of the ultimate determination whether the worker is economically dependent on the employer or truly an independent businessperson. The worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business.
Take Away: The construction industry was targeted with two examples of what makes a worker an employee. Clearly, the DOL is looking at the construction industry for misclassification abuses. But, look at the Special Skills example. If you are hiring independent contractors that are active in the marketplace, doing work for other contractors, controlling their own shop, you stand a good chance of prevailing against any claims that he is an employee, not an independent contractor. But, if you are the only source of business for that contractor, you should examine that situation closely.