Most Independent Contractors are Misclassified, Department of Labor’s Wage and Hour Division Says

By: Lisa M. Schonbeck, Esq.

On July 15, 2015, the Wage and Hour Division of the United States Department of Labor (“DOL”) issued Administrator’s Interpretation No. 2015-1 asserting its position that the majority of workers classified as independent contractors are, in reality, employees covered under the Fair Labor Standards Act (“FLSA”).

Noting that the FLSA’s definition of “employ” is broadly defined as “to suffer or permit to work” and that Congress rejected the common law control test in favor of the more expansive “economic realities” test, the DOL concluded that the “suffer or permit” standard ensures “as broad of a scope of statutory coverage as possible.” As the DOL explained, an employer “suffers or permits” an individual to work if the economic realities indicate that the individual is dependent on the employer, and “the application of the economic realities factors must be consistent with the broad ‘suffer or permit to work’ standard of the FLSA.”

The DOL discussed in detail each of the various factors to be evaluated in the economic realities test for determining whether a worker is an employee under the FLSA, stressing that the analysis is qualitative, not quantitative. These factors typically include the following:

• The extent to which the work performed is an integral part of the employer’s business;
• The worker’s opportunity for profit or loss depending on his or her managerial skill;
• The extent of the relative investments of the employer and the worker;
• Whether the work performed requires special skills and initiative;
• The permanency of the relationship; and
• The degree of control exercised or retained by the employer.

According to the DOL, the driving consideration in evaluating these factors is whether the worker is in business for him or herself (and thus an independent contractor) or is economically dependent on the employer (and thus an employee). Therefore, although all of these factors must be considered in evaluating the economic realities of the relationship between the worker and employee, the DOL indicated that some of these factors, such as whether the contractor is performing work that is integral to the business, are more persuasive than others (such as the degree of control).

The DOL issued this interpretation after years of focus on misclassification issues, as evidenced by several memoranda of understanding between the DOL and various states, as well as the Internal Revenue Service, pursuant to which the agencies agree to share information on misclassification. If a worker is found by the DOL, another agency, or a court to be misclassified as an independent contractor, the employer risks liability for minimum wage, overtime, unemployment insurance, workers’ compensation, and income tax violations.

Federal courts typically give deference to agency interpretations, but such deference is not required. Nevertheless, there can be no doubt that the DOL will continue to scrutinize independent contractor relationships, particularly in those industries where such arrangements are common, such as, for example, industries that employ low-wage workers, the construction industry, and the oil and gas industry. Furthermore, the DOL stressed that a written agreement labeling the relationship will routinely be disregarded, stating that such agreements are “not indicative of the economic realities of the working relationship and [are] not relevant to the analysis of the worker’s status.” Therefore, employers are encouraged to closely review their independent contractor relationships, paying particular attention to the actual practices with such independent contractors. If the factors weigh against independent contractor status, employers should take appropriate steps to minimize the risks of misclassification, such as reclassifying workers as employees.

Leech Tishman’s Employment Practice Group has extensive experience working with the Department of Labor and other federal, state and local employment agencies. We have assisted clients through a variety of DOL audits as well as worker classification issues and are available to assist you in evaluating your independent contractor relationships.

Lisa M. Schonbeck is a partner at Leech Tishman and practices in the Employment and Litigation Practice Groups. Lisa can be reached at 412.261.1600 x 233 or lschonbeck@leechtishman.com. Please feel free to contact Lisa with any questions regarding the developments in the DOL or any other employment law issue.

Leech Tishman is a firm dedicated to providing full-service commercial legal services to individuals, businesses, and institutions. We combine a deep understanding of our clients and their businesses with skilled legal counsel to find solutions. Leech Tishman offers legal services in alternative dispute resolution, bankruptcy & creditors’ rights, construction, corporate, employee benefits, employment, energy, environmental, safety & toxic torts, estates & trusts, government relations, immigration, insurance coverage & corporate risk mitigation, intellectual property, internal investigations, international legal matters, litigation, real estate, and taxation. Headquartered in Pittsburgh, PA, Leech Tishman also has offices in Chicago, Los Angeles, New York and Wilmington, DE. For more information call 412.261.1600 or visit us at www.leechtishman.com.