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2016 Mitigating Risk: Key Litigation Developments

Employment >> DOL Takes on Misclassification of Employees as Independent Contractors

April 5, 2016

The U.S. Department of Labor’s Wage and Hour Division (WHD) has significantly stepped up its efforts to reduce the misclassification of workers as independent contractors under the Fair Labor Standards Act (FLSA). In 2015 alone, WHD investigations resulted in more than $74 million in back wages for more than 102,000 workers in a variety of industries.

An employer’s failure to properly classify its workers could result in liability for years of unpaid wages, benefits, and employment taxes, in addition to penalty fees. In addition, a misclassification also could result in employers having to defend costly class action litigation, as well as manage investigations by the WHD (or equivalent state agencies).

In July 2015, the WHD issued an administrative interpretation on the misclassification of employees as independent contractors. In the interpretation, the WHD emphasized the broad definition of “employee” under the FLSA. Citing to established case law, the WHD stated that a worker was an “employee” if, “as a matter of economic reality,” the individual was “dependent on the entity.” In other words, if the worker was economically dependent on the employer, the worker was an employee, but if the worker truly was in business for himself or herself, the worker was an independent contractor.

The WHD rejected the “common law control test,” which focused only on whether the employee was “controlled” by the employer. Instead, the WHD endorsed the “economic realities” test, which had been developed by the U.S. Supreme Court and the circuit courts of appeals to serve as a roadmap for determining whether a worker was an employee or an independent contractor. All six factors of the test must be considered:

  • The extent to which the work performed was 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 permanence of the relationship; and
  • The degree of control exercised or retained by the employer.

The WHD further emphasized that the contractual “label” the employer gave to the relationship was far less important than “whether the work done, in its essence,” followed the “usual path of an employee.” Thus, merely entering into an independent contractor agreement with a worker, or issuing a Form 1099-MISC to a worker, was not enough to establish an independent contractor relationship.

Takeaways

  • Although the WHD’s recent interpretation was not a formal rule and was not binding, it represented the latest effort to deal with what WHD Administrator David Weil has called the “growing problem” of misclassification.
  • The WHD has entered into partnerships with over 25 state labor agencies to share information and coordinate enforcement efforts to reduce employee misclassification. Given the increased scrutiny, employers should take the interpretation into consideration when making decisions about the classification of their workers.
  • Decisions about classification will be impacted by factors including the nature of the company’s business, the type of work being performed, and the extent to which the worker provides services to other companies.

Author(s)

HOWARD J. RUBIN
Partner/Co-Chair
212.468.4822
hrubin@dglaw.com
Litigation