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U.S. Department of Labor Issues Administrator’s Interpretation on Employee / Independent Contract Classification

By Stan Hill and Jay M. Dade

On July 15, 2015, the Wage & Hour Division of the United States Department of Labor issued a 15-page Administrator’s Interpretation offering the DOL’s view on how the Fair Labor Standards Act’s (“FLSA”) definition of “employ,” meaning “suffer or permit” work, impacts the legal test for whether workers are considered employees or independent contractors.  A business with properly classified independent contractors need not compensate such individuals in accordance with the minimum wage and overtime requirements FLSA. 

Although the Administrator’s Interpretation is not binding law, it previews positions DOL likely will take in future investigations and litigation challenging the classification of independent contractors.  The Administrator’s Interpretation also may influence court decisions and those of various state and other federal agencies grappling with the “employee v. independent contractor” issue.  Consequently, the Interpretation should inform employers’ regular internal reviews of existing and proposed classifications.

The Administrator’s Interpretation laments so-called “fissured workplaces,” resulting from increasing replacement of employees with contracted labor, through the use of subcontractors, temporary agencies, labor brokers, franchising, licensing and third-party management.  Meanwhile, as discussed in our ongoing Uber Watch post series, independent contractors have also burgeoned through participation in the sharing economy, across various service industries.   

The Administrator’s Interpretation notes the evolving “nature of [] business, regulatory requirements, or the desire to ensure that [] customers are satisfied” do not create exemptions from the economic realities test.  If one or more of these circumstances trigger the factors under the “economic realities” test, an employment relationship is more likely to be found.

A multi-factored “economic realities” test is commonly applied to determine whether an employer “suffers or permits” work creating an employment relationship triggering the FLSA.  The July 15, 2015 Administrator’s Interpretation discusses six factors:

  1. Is the work an integral part of the employer’s business?
  2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
  3. How does the worker’s relative investment compare to the employer’s investment?
  4. Does the work performed require special skill and initiative?
  5. Is the relationship between the worker permanent or indefinite?
  6. What is the nature and degree of an employer’s control?

Many state laws, such as state overtime laws, unemployment insurance, worker’s compensation, implicate different tests for classifying independent contractors and employees.  Thus, an independent contractor relationship should be assessed on a state-by-state and law-by-law and basis.  

Businesses, especially in labor intensive industries and the sharing economy, should closely track the evolving standard of employment and independent contractor classification.  We will track how the Administrator’s Interpretation affects future DOL Wage & Hour investigations and whether it is cited persuasively by courts interpreting the FLSA.