In July, the U.S. Department of Labor (DOL) issued Administrator’s Interpretation 2015-1: The Application of the Fair Labor Standards Act’s “Suffer or Permit” Standard in the Identification of Employees Who Are Misclassified as Independent Contractors. The document provides guidance for determining whether a worker is properly classified as an independent contractor under the Fair Labor Standards Act.
The purpose of the guidance is to advance the DOL’s interpretation of the “economic realities” test used to determine whether a worker is an employee for purposes of the Fair Labor Standards Act (FLSA) in the hope that courts will apply it.
As the title of the DOL document suggests, the economic realities test finds its origin in the FLSA’s definition of “employ” as “to suffer or permit to work.” 29 U.S.C. 203(g). While the language seems archaic to 21st-century ears, it made a lot of sense near the middle of the last century. The “suffer or permit” standard, common in state laws, reached businesses that used go-betweens to hire and supervise children illegally. The theory behind “suffer or permit” was that if the employer had the opportunity to detect illegal work as well as the ability to stop it, liability was justified. Child labor laws could thus prevent the employer from escaping liability by claiming it was unaware of child labor occurring at its place of business.
The older “control” test, which derived from common-law agency principles, analyzes whether a worker is an employee based on the employer’s control over him or her. This newer standard asks whether, as a matter of economic reality, the individual is economically dependent on the business. The test consists of the following questions:
Is the Work an Integral Part of the Employer’s Business?
The more integral the work, the more likely the worker is economically dependent on the employer and thus an employee. The DOL provides the following examples:
- Work performed by cake decorators “is obviously integral” to the business of selling custom-decorated cakes.
- Pickle picking is “a necessary and integral part of the pickle business … .”
- “A worker answering calls at a call center along with hundreds of others is performing work that is integral to the call center’s business even if that worker’s work is the same as and interchangeable with many others’ work.”
Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
A worker who makes good decisions leading to an increase in business may be an independent contractor. Perversely, the same holds true when that worker loses money due to bad decision making. But if the worker’s ability to work more hours enables her to make more money or the employer makes more work available leading to an increase in pay, managerial skill was not a factor and the worker looks more like an employee.
How Does the Worker’s Relative Investment Compare to the Employer’s Investment?
The worker should invest in his or her business, thereby assuming the risk of potential loss, to meet the definition of independent contractor. A true independent contractor makes investments in the business that sustain it past the completion of any individual job. Examples include investments in expansion and marketing.
Does the Work Performed Require Special Skill and Initiative?
A skilled carpenter could provide skilled services in a dependent manner. For example, the carpenter, who could be properly classified as an independent contractor under some circumstances, works at a job site where no independent judgment is needed. Instead, his considerable skill is directed by someone else. This individual is not exercising special skill and initiative, but merely providing skilled labor.
Is the Relationship between the Worker and the Employer Permanent or Indefinite?
A worker who is truly in business for him or herself typically avoids a permanent, dependent relationship with an employer.
What is the Nature and Degree of the Employer’s Control?
A true independent contractor is in control and gives the appearance of someone conducting his or her own business.
“Misclassified employees often are denied access to critical benefits and protections to which they are entitled, such as minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces,” says DOL Administrator David Weil. “Employee misclassification generates substantial losses to the federal government and state governments in the form of lower tax revenues, as well as to state unemployment insurance and workers’ compensation funds. It hurts taxpayers and undermines the economy.”
It takes a village to combat misclassification, so the DOL has entered into memoranda of understanding with more than 25 states to share information and root out businesses misclassifying employees as independent contractors. It’s important to remember that no single factor controls the determination, and that all factors must be considered “in totality.”
The practical effect of this new guidance is that more workers will fail the definition of “independent contractor.” If you have workers you classify as independent contractors, you should proceed with caution. MSEC can assist you with all aspects of this issue.