DOL Administrator Letter Says Many Employees Misclassified as Independent Contractors

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pat for news_portrait.jpgAs the economy begins to heat up, the Wage and Hour Division of the Department of Labor will be focusing on employer classification of workers.  David Weil, the US DOL Wage and Hour Administrator, has written an Administrator’s Interpretation reviewing the factors in evaluating employee vs independent contractor status as a guide for employers.  He cites a number of calls to the DOL from workers who thought they were misclassified (presumably because they were not eligible for overtime and benefits).   While there are a number of considerations, the guidance makes it clear that a worker who is suffered or permitted to work (FLSA) and is economically dependent on an employer is an employee.  Weil further states that he believes that most workers are employees.

 

The guidance identifies the various factors that should be evaluated under the economic realities test and provides examples for each factor of the decision making process to arrive at an employee or independent contractor decision.   Weil advises employers to look at all of the following factors and assess each in the framework of determining as a whole whether the worker is economically dependent on the employer or independent.

 

  • Is the work performed integral to the employers business (the reason the business exists)?  Employees generally perform work integral to the business; independent contractors perform support functions.  Where the work is performed is irrelevant in making this determination (on premises, at customer sites, or at the worker’s home).
  • Does the worker have managerial skills that can affect the opportunity for profit or loss?  This factor evaluates independent judgment and decision making in such areas as hiring others, purchasing materials and equipment, renting space, advertising, and managing time tables.  For independent contractor status, the answer should be yes. Decisions on working more or less hours on a project that may affect income do not meet the criteria for profit or loss opportunity.
  • How does the worker’s investment in the business compare to the employer’s investment?  An independent contractor should make some investment to support his/her independent business to show the potential for profit or loss.  This has to be considered along with the worker’s investment related to the employer’s investment in weighing economic independence.
  • Does the work require special skill and initiative?  The examples cite cases where a carpenter may be an employee where they only use their technical skills versus a carpenter who may be an independent contractor utilizing those skills as well as business skills, judgment and initiative in performing their work.
  • What is the duration of the relationship between worker and employer?  Weil states that permanency or indefiniteness in the relationship suggests that the worker is an employee.  Other considerations are the operational characteristics of the industry and the worker’s own independent business initiative.
  • What is the nature and degree of employer control?  An independent contractor must control meaningful aspects of the work performed.  Weil cites court cases where businesses have argued that their control of a worker who was classified as an independent contractor was necessary because of the nature of their business, regulatory requirements, or customer relations; however the court said “Business needs cannot immunize employer’s from the FLSA’s requirements.”

 

The Interpretation concludes by saying that no one factor should be given more weight than the others, but should be evaluated to contribute to the determination as a whole of whether a worker is an employee or independent contractor.

 

Take the time now to review the Administrator’s Interpretation http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.htm and evaluate any workers you currently have classified as independent contractors.  Should you discover any misclassification, make the correction and review any potential remedy for past overtime with CAI or counsel. The DOL lookback period for making corrections for non-willful violations is two years.

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