Independent Contractor Classification Clarified amid Crackdown

On July 15, the U.S. Department of Labor (DOL) issued an administrator’s interpretation regarding the application of the Fair Labor Standards Act with respect to the misclassification of workers as independent contractors.

The new interpretation is required reading for any business that uses independent contractors to any degree – often or seldom. It’s also important as the government continues to crack down on companies that misclassify their employees as independent contractors, most recently evidenced by the decision that Uber drivers are employees, and not independent contractors.

The interpretation came after a ruling by the California Labor Commissioner’s Office that a driver for the ride-hailing service should be classified as an employee, not an independent contractor. The ruling ordered Uber to reimburse a driver $4,152.20 in expenses and other costs for the roughly eight weeks she worked as an Uber driver last year.

Some of the main points in the DOL’s interpretation are:

  • It is the DOL’s unequivocal opinion that “most workers are employees,” under the Fair Labor Standards Act.
  • It fully embraces the “economic realities” test (explained below) as the DOL’s preferred approach to determining whether a worker is an employee or a contractor.
  • It downplays the significance of an employer’s exertion of control over the tasks performed by the worker.
  • It reinforces the DOL’s pattern over the last several years of aggressively examining the classification of workers as contractors.

 

The “economic realities” test includes the following factors:

  • 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

 

The changes are not so dramatic, however, and the interpretation should give employers a good roadmap to use when designating employees.

Despite the last item on the list, covering the degree of control the employer exerts over an independent contractor, the DOL actually de-emphasized it repeatedly in the interpretation. Up until this interpretation, degree of control had been a central part of assessing whether a contractor actually is an employee.

That said, because the agency is downplaying this now, it means that employers could be in for a few surprises and time will tell what factors are taking more precedence.

Ultimately, the goal of the economic realities test is to determine whether a worker is economically dependent on the employer (and is therefore an employee), or is really in business for him or herself (and is therefore an independent contractor). This new document should be your guidepost if you currently are using independent contractors or plan to classify someone as an independent contractor in the future.

 

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