Are Your Independent Contractors Really Employees?
According to the Department of Labor’s (“DOL”) most recent guidance on the difference between an “employee” and an “independent contractor,” the answer to this question is likely: “Yes.”
On July 15, 2015, the DOL issued an Administrator’s Interpretation on the application of the Fair Labor Standards Act’s (“FLSA”) standard used to identify employees who are mischaracterized as independent contractors. The Interpretation clarifies in detail how to determine whether an employer has improperly characterized an employee as an independent contractor. According to the Interpretation, most workers should be considered employees under the FLSA, even in trades which have traditionally employed independent contractors such as janitors, construction workers, and traveling nurses. Because classification as an employee will likely require the employer to provide the minimum wage, overtime, unemployment and workers’ compensation insurance, among other things, we recommend that employers become familiar with the “economic realities test” that is being used to determine this issue.
In determining whether a worker is an “employee” or an “independent contractor,” the following six factors of the “economic realities” test are relevant:
- Is the work an integral part of the employers business?
Here, if the work performed is integral to the employer’s business it is more likely that the worker is economically dependent on the employer. In other words, workers are more likely to be employees if they perform the primary work of the employer.
- Does the workers’ managerial skill affect the workers’ opportunity for profit or loss?
A worker in business for him or herself faces the possibility to not only make a profit but also to experience a loss. A worker’s decisions to hire others, purchase materials and equipment, advertise, rent space, and manage time tables may indicate that the employee has managerial skills that will affect the opportunity for profit or loss beyond a current job.
- How does the worker’s relative investment compare to the employer’s investment?
The worker should make some investment that supports his or her business beyond a particular job in order to be considered an independent contractor. Investing in tools or equipment is not necessarily an investment. Only when the investment is significant when compared to the employer’s investment will the worker be considered an independent contractor.
- Does the work performed require special skill and initiative?
A worker’s business skills and judgment, not his or her technical skills, will be analyzed in order to determine whether the worker is economically independent.
- Is the relationship between the worker and the employer permanent or indefinite?
The key here is whether the lack of performance or indefiniteness is indicative of the worker running an independent business. If there is some indefiniteness, the inquiry is whether it is due to “operational characteristics intrinsic to the industry,” like staffing agencies, or seasonal industries.
- What is the nature and degree of the employer’s control?
This element should be analyzed in the light of whether the worker is truly an independent businessperson. An employer’s lack of control, for example, is not particularly telling if the worker works from home or offsite. In addition, the DOL clarified that this element should not play an “oversized” role in the analysis, as it has in the past.
Ultimately, all of these elements will be liberally applied, and will be analyzed in relation to one another, with no single factor being determinative. The DOL cautioned that the factors are not a “checklist” but should be reviewed qualitatively.
Mischaracterizing an employee as an independent contractor can have a harrowing effect on your business. With this new guidance, the best practice would be to take a close look at your businesses’ relationships with workers classified as independent contractors, and determine if those workers should in reality be classified as employees. If you have questions on how the new guidance from the DOL may affect your business, we are here to help.