HR Management & Compliance

New guidance signals tougher stance on independent contractor classification

A new interpretation of language in the federal Fair Labor Standards Act (FLSA) is the latest effort in the government’s fight against what it sees as troubling misclassification of employees as independent contractors.

On July 15, David Weil, administrator of the U.S. Department of Labor’s (DOL) Wage and Hour Division (WHD), released Administrator’s Interpretation 2015-1 to analyze how the FLSA determines whether an individual should be classified as an employee or an independent contractor.

Employers are able to avoid certain taxes and benefits costs when they use independent contractors. Therefore, the DOL has long battled what it sees as a proliferation of workers misclassified as independent contractors when they instead fit the law’s definition of “employee.” The tests used to determine employee or independent contractor status aren’t always clear-cut, however, and the new guidance is seen as further restricting who fits the definition of “independent contractor.”

The new guidance “places new emphasis on what appears to be a concerted effort . . . to eventually supplant the economic realities test with an even more restrictive economic independence test in order to restrict reliance on independent contractor status even further,” Robert Tinnin, editor of New Mexico Employment Law Letter and an attorney with the Tinnin Law Firm in Albuquerque, New Mexico, said.

Tinnin pointed to the first sentence of the interpretation document’s conclusion: “In sum, most workers are employees under the FLSA’s broad definitions.”

That language “signals clearly that the DOL will virtually presume workers are employees as opposed to independent contractors,” Tinnin said. “This expanded emphasis on the ‘economic independence’ factor is tantamount to the adoption of a new, even more restrictive standard.”

Tinnin said he warns employers that want to classify workers as independent contractors to “carefully and critically examine the requirements of a job before opting for independent contractor status.” The new guidance “reinforces the validity of a strategy of caution in classifying workers as independent contractors,” he said.

Albert L. Vreeland, the editor of Alabama Employment Law Letter and an attorney with Lehr Middlebrooks Vreeland & Thompson, P.C. in Birmingham, Alabama, said the new administrator’s interpretation doesn’t change the DOL’s view on who is an independent contractor and who is an employee. Instead, “it merely restates the position they have taken before,” he said.

“It does, however, draw more attention to the issue and may encourage some independent contractors and their attorneys to challenge the classification,” Vreeland said.

The new interpretation explains that to determine whether a worker is an employee or an independent contractor under the FLSA, “courts use the multifactorial ‘economic realities’ test, which focuses on whether the worker is economically dependent on the employer or in business for him or herself.”

The guidance states that a worker who is economically dependent on an employer “is suffered or permitted to work” by the employer. “Thus, applying the economic realities test in view of the expansive definition of ‘employ’ under the Act, most workers are employees under the FLSA. The application of the economic realities factors must be consistent with the broad ‘suffer or permit to work’ standard of the FLSA,” the document states.

In addition to the administrator interpretation, Weil posted an entry on the DOL blog in which he said misclassified employees are often denied access to benefits and protections they should be entitled to. He also said misclassification means losses to the federal and state governments in the form of lower tax revenues and less revenue to state unemployment insurance and workers’ compensation funds.

“In recent years, employers have increasingly contracted out or otherwise shed activities to be performed by other entities through, for example, the use of subcontractors, temporary agencies, labor brokers, franchising, licensing and third-party management,” Weil wrote on the blog. “Among the many consequences of these ‘fissured workplaces,’ misclassifying employees as independent contractors is among the most damaging to workers and our economy.”

Weil’s blog post uses terminology from the title of a book he wrote before taking his DOL post, The Fissured Workplace: Why Work Became So Bad for So Many and What Can Be Done to Improve It.

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