Back in the Saddle: A PSA and Independent Contractors

Oct 5, 2015

Happy fall! For my loyal readers, you have likely realized that I have not updated this blog for several months. This is because in April I was diagnosed with stage 1 estrogen receptive breast cancer. Over the last six months I have undergone surgery and treatment and thanks to my fantastic doctors, I am now on the other side. Since October is breast cancer awareness month, I did not feel right posting my first entry after my diagnosis without first reminding all of you about the importance of self-exams, mammograms, and listening to your bodies. So if you or an important woman in your life has been putting off scheduling a routine appointment or asking about something causing worry, don’t any longer. Fortunately, my cancer was caught very early. I’m now living proof that early diagnosis can save lives. So please, take it seriously.

The courts and administrative agencies have also been busy over the last six months, so with my next several posts I’ll address some of the important decisions and changes that have occurred. I’m starting with the Department of Labor Administrator’s Interpretation issued in mid-July addressing independent contractor misclassification.

In this Interpretation, the DOL makes clear to employers that “most workers are employees [not independent contractors] under the FLSA.” It comes to this conclusion by relying on the broad definition of “employ” in the FLSA—specifically, you “employ” someone if you “suffer or permit [him/her] to work.” We are typically discussing this definition when determining whether you have to pay someone for a duty performed. However, the Interpretation uses this same definition when determining whether a worker is an employee or an independent contractor.

Employers typically think of the control test when determining whether a worker is an independent contractor or an employee, focusing on whether the employer or the worker exercises more control in the relationship. However, according to the Interpretation, the DOL will not be relying on the control test. Instead, it will focus on the economic realities test, viewed in light of the broad definition of “employ.”

The economic realities test focuses on whether the worker is operating an independent business or merely contributing to the business of the employer. Only in circumstances where the worker is operating an independent business that is economically dependent on the worker, not the employer, will the worker be an independent contractor. The Interpretation sets forth the following factors to be used in applying the economic realities test (with none being determinative):

  1. Is the work an integral part of the employer’s business?
  2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
  3. How does the worker’s relative investment compare to the employer’s investment?
  4. Does the work performed require special skill and initiative?
  5. Is the relationship between the worker and the employer permanent or indefinite?
  6. What is the nature and degree of the employer’s control?

The Interpretation discusses each of these factors in detail. You can read the entire document here: http://www.dol.gov/whd/workers/misclassification/AI-2015_1.pdf.

The Interpretation also provides that an agreement between the parties is “not relevant” to proper classification. I advise that having an agreement is still a good idea because it clearly sets the expectations of the parties. However, understand that the DOL likely will not consider the agreement in determining proper classification.

I advise that you reconsider each of your independent contractor relationships in light of this Interpretation. The risk of misclassifying even a few employees can be significant, including unpaid minimum wage and overtime for the workers as well as unpaid unemployment taxes, workers’ compensation insurance, and other employment-related tax liabilities. If you have questions about proper classification, seek legal counsel.

And please, take a moment today to look out your window or better yet, step outside, and marvel at this beautiful fall world…It’s good to be back!

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