DOL Releases Independent Contractor Guidance

July 22, 2015

pic-owner-workers-exportOn July 15, David Weil, Administrator of the Department of Labor’s (DOL) Wage and Hour Division (WHD), released guidance addressing how to assess whether a worker is properly classified as an independent contractor. The 15-page memo focuses on new interpretations of the Fair Labor Standards Act (FLSA).

The guidance lays out a six-factor “economic realities” test with an emphasis on the FLSA’s broad definition of employment and focuses on whether or not a worker is classified as an employee. The guidance also clarifies vague definitions in FLSA legislation, which may help courts in cases that ask whether an employee should be considered an independent contractor or an employee.

Under the new economic realities test a number of factors are considered that analyze the work through a qualitative lens. These factors include the importance of the work to the employer’s business, the affect of the worker’s managerial skills on his or her opportunity for profit or loss, and the longevity and frequency of the worker’s relationship with the employer. The guidance also focuses on how economic dependence and financial investment of the worker affects if he or she is to be registered as an employee or an independent contractor.

The test takes into account a worker’s business skills, judgment and initiative in deciding whether the worker is legitimately classified as an independent contractor. In addition, a business’ control over the worker is taken into account, though the guidance warns that this should not play too large a role in the analysis.

Misclassification of employees as independent contractors has been a primary concern for the DOL for several years, as independent contractors are not protected by most employment laws such as Title VII of the Civil Rights Act and the FLSA. The agency has become more aggressive in targeting certain sectors—construction contracting, as well as nursing, janitorial, landscaping, restaurant, temp agencies, hotel industry, cable installation and security guard fields—where it believes the practice is more rampant and workers are more vulnerable.

As a result of this new guidance, employers will likely find it increasingly difficult to defend independent contractor classifications—the U.S. had 10.3 million independent contractors in 2010, according to the Bureau of Labor Statistics. Importantly, this guidance does not have the force of law, but it is intended to advise the public of how the DOL interprets its own statutes, and courts will consider this interpretation in future litigation. As a result, employers will now have to observe the new DOL guidelines to prevent future liability with respect to misclassification and ensure full compliance with the FLSA.

The full text of the Administrative Guidance can be found here. More details on the DOL’s Misclassification Initiative are available here.