DOL: Most Workers Are Employees, Not Independent Contractors

This past summer, the Wage and Hour Division of the U.S. Department of Labor (DOL) issued a formal interpretation memo regarding the Fair Labor Standards Act (FLSA), and, in particular, the issue of the classification of independent contractors. The memo can be viewed in its entirety on the DOL’s website.

The DOL’s memo is of particular interest because it expands the applicable criteria for determining whether a worker is an independent contractor or an employee entitled to the legal protections of the FLSA, including minimum wage, overtime compensation, unemployment compensation, and workers’ compensation. In its memo, the DOL notes that employers often misclassify employees as independent contractors to cut costs and avoid complying with labor laws such as the FLSA.

The DOL’s memo clarifies that the “economic realities” of the relationship between the employer and the worker must be examined in order to properly classify the worker. This is notably different from the now-outdated “control test,” which analyzed whether a worker is an employee based on the employer’s control over the worker. The DOL explains that the economic realities test is broader than the control test.

Under the economic realities test, the degree to which the employer controls the worker is just a single factor to be considered in the context of a larger inquiry into the economic relationship between the parties. Also relevant are: (a) the extent to which the work performed is an integral part of the employer’s business, (b) the worker’s opportunity for profit or loss depending on his or her managerial skill, (c) the extent of the relative investments of the employer and the worker, (d) whether the work performed requires special skills and initiative, and (e) the permanency of the relationship.

The DOL notes that no single factor is determinative. Rather, “[t]he factors should be considered in totality to determine whether a worker is economically dependent on the employer, and thus an employee.” A worker who is in business for him or herself, and is thus economically independent from the employer, is an independent contractor. Critically, the DOL explains that these factors should be “liberally construed” to provide broad coverage and protection for workers. According to the DOL, how the employer labels the relationship is not relevant to determining the worker’s classification.

The DOL concludes that “most workers are employees under the FLSA’s broad definitions.” This conclusion is critical, in that it indicates the DOL’s intention to provide expansive coverage to workers who are entitled to the FLSA’s legal protections, even when employers are attempting to classify those workers as independent contractors.

If you have questions about how your employer has classified you, please contact us at (215) 656-3600.

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