Department Of Labor Issues New Independent Contractor Classification Guidance, Stating That “Most Workers” Are Employees

On July 15, 2015, the Department of Labor (“DOL”) issued new guidance that is meant to clarify when an employer can properly classify a worker as an independent contractor under the Fair Labor Standards Act (“FLSA”). The DOL explains that it takes a “very broad” view of the definition of employment and that the distinction between employee and independent contractor is intended to focus on the “economic dependence” of the worker rather than just the level of control held by the employer over the worker.

Courts use the familiar multi-factor “economic realities” test to determine how a worker should be classified under the FLSA.  In the guidance, the DOL emphasized that this test must be applied in light of the “expansive” and “broad” FLSA definition of employ, which means “to suffer or permit to work.”  According to the DOL, when the test is applied properly, “most workers are employees under the FLSA.”

The ultimate inquiry for the DOL is economic dependence, i.e., whether the worker is truly in business for himself or herself.  Only where the worker is economically independent from the employer should he or she be classified as an independent contractor.  The DOL describes the factors used to make this determination as follows:

  • The extent to which the work performed is 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 work;
  • Whether the work performed requires special skills or and initiative; the permanency of the relationship; and
  • The degree of control exercise or retained by the employer.

According to the DOL, each factor must be examined and analyzed in relationship with the others and in light of the overall focus on economic dependence and providing “broad coverage” for workers. Additionally, no single factor should be deemed determinative—in particular, according to the guidance, the “control” factor should not be given “undue weight.” TheDOL guidance discusses each of the foregoing factors in detail, with case citations and examples.

Although the DOL says that it is not breaking new ground or policy with the guidance, the guidance, as well as DOL’s Misclassification Initiative, makes clear that the DOL intends to take an expansive view of the definition of employment, and will likely aggressively enforce this position against employers, whether the worker at issue is labeled an “independent contractors,” or something else – like “owner,” “partner,” or “member of a limited liability company.”  Employers should use this occasion to review non-employee classifications in light of the guidance.

For additional information about the DOL’s guidance and its impact on your workforce, please contact one of the authors of this alert or the Hogan Lovells lawyer with whom you work.