Thursday, July 16, 2015

Who is an employee? DOL has answers in guidance on independent-contractor status

I’ve written a lot in the past year about the distinction between employees and independent contractors under federal wage-and-hour laws (here, here, here, and here).

To me, here is what it all boils down to (cribbed from my post, The “duck” test for independent contractors:

The best test to determine whether a worker is an employee or an independent contractor is the “duck” test—if it looks like an employee, acts like an employee, and is treated like an employee, then it’s an employee…. I think you know an employee when you see one.

I’ve also cautioned that it is very difficult for an employer to justify the classification of a worker as an independent contractor, and that if you exercise any control over how workers perform services for you, it is likely that they should be classified as employees, not independent contractors.

Make no mistake, this issue is of vital importance, because the mis-classification of an employee as a contractor carries with it serious implication under the FLSA, the employment discrimination laws, ERISA, tax laws, and any other laws that regulate the relationship between employer and employee.

Yesterday, the Department of Labor’s Wage and Hour Division Administrator David Weil issued a crucial Administrator’s Interpretation on this issue. Entitled, “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 guidance clarifies the uphill battle employers face on this issue and asserts that “most workers are employees.”

In sum, most workers are employees under the FLSA’s broad definitions. The very broad definition of employment under the FLSA as “to suffer or permit to work” and the Act’s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor. The factors should not be analyzed mechanically or in a vacuum, and no single factor, including control, should be over-emphasized. Instead, each factor should be considered in light of the ultimate determination of whether the worker is really in business for him or herself (and thus is an independent contractor) or is economically dependent on the employer (and thus is its employee).

What should employers do in response to this guidance? At the end of the day, nothing different than that which I’ve been suggesting for the past few years—in all but the clearest of cases, assume that everyone you pay in exchange for services is an employee, and act accordingly. This issue is squarely on the the DOL’s radar, and employers who take unnecessary risks do so at their peril.