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Employee Or Independent Contractor? New DOL Guidance Sheds Light

August 10, 2015 by

On July 15, the United States Department of Labor weighed in on a topic in employment law receiving increasing media attention–the misclassification of employees as “independent contractors.”  In the new Guidance memo, the DOL lays out its interpretation of the legal test that determines the classification of a worker under the FLSA’s multi-factor “economic realities” test with illustrative examples.

The “economic realities” test derives from the FLSA’s definition of “employ” as “to suffer or permit to work.”  Under this broad definition of employment, the focus is on the economic dependence of the employee on the employer.  The test examines many different dimensions of work, without making any factors more important than others.  What is significant here is that the DOL states that in applying the “economic realities” test, “the ultimate inquiry under the FLSA is whether the worker is economically dependent on the employer or truly in business for him or herself.

The factors discussed in the Guidance are:

  • Whether the work is an integral part of the employer’s business. If the worker provides the specific service the employer sells to the public, that worker is probably not an independent contractor. For example, for a cab company, drivers are an integral part of providing that service.
  • Whether the worker’s managerial skill affects the worker’s opportunity for profit or loss.  Independent contractors tend to independently schedule assignments, solicit work from clients, advertise services and manage the costs of doing business.  Employees tend to perform assignments as determined by the employer, utilizing none of the managerial skills of independent contractors.
  • The worker’s relative investment as compared to the employer’s investment. Independent contractors usually make some investment in his or her enterprise, indicating that the business is separate from the employer’s, and that extends beyond any particular job.
  • Whether the worker uses business skills, judgment, and initiative.  Technical skill does not indicate independent contractor status, whereas utilizing business-like initiative in an independent way does.
  • Whether the relationship between the worker and the employer is permanent or indefinite. Independent contractors tend to be hired for discrete tasks, and employees are engaged for more permanent or indefinite positions.
  • The extent to which the employer controls the way work is performed. A great degree of control over the means and methods of job duties, and training of the employee to perform his or her job, indicates the worker is an employee.  A greater degree of supervision indicates an employment relationship.

While the Guidance did not announce a new legal standard or plan for enforcement, it forcefully affirmed the broad scope of the employment relationship under federal law, making clear that most workers–and especially low-wage workers–are employees and not independent contractors.  While this sort of guidance from administrative agencies is not binding on courts, it tends to have persuasive force in wage and hour cases where misclassification is a legal issue.  The new DOL Guidance gives unions and worker advocates a new weapon to use in the attack on employee misclassification.

Click here for the Department of Labor’s Guidance.

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The material on this website is provided by Beeson, Tayer & Bodine for informational purposes only and does not constitute legal advice. Readers should consult with their own legal counsel before acting on any of the information presented. Some of the articles are updated periodically, and are marked with the date of the last update. Again, readers should consult with their own legal counsel for the most current information and to obtain professional advice before acting on any of the information presented.