Department of Labor Issues Interpretive Letter Clarifying Distinctions Between Employees and Independent Contractors

Finding that employers are incorrectly classifying employees as independent contractors, the U.S. Department of Labor (DOL) issued an Interpretive Letter on July 15, 2015 that offers clarification on the issue. The Fair Labor Standards Act (FLSA) defines ‘employ’ as “to suffer or permit to work.” Although many courts rely heavily on the “control test,” the letter advises that under the FLSA the “economic realities test” is the correct inquiry into whether or not a person is an employee or an independent contractor.

In short, the economic realities test asks whether the person is economically dependent on the employer or is in business for him or herself. If dependent, the worker is an employee, and if not, the worker is an independent contractor. Considering the FLSA’s statutory directive that the scope of the employment relationship is “broad,” it appears that the DOL intends to make it easier for courts to designate workers as employees as opposed to independent contractors. All of the following non-exclusive economic realities must be considered when deciding whether a worker is an employee or an independent contractor:

1. Is the work an integral part of the employer’s business? If the work is integral to the employer’s business, the worker is more likely to be an employee. Integral work includes tasks that may represent only one component of a business process, or tasks that can be performed by thousands of other workers. Further, integral work may be performed away from an employer’s premises or even on the premises of the employer’s customers.

2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss? Importantly, this question does not turn on the worker’s ability to work more hours. Rather, the question is whether or not the worker’s managerial skills can lead to the opportunity for profit or loss beyond the current job. For instance, a workers decision to hire others, purchase materials and equipment, advertise and manage time tables are all managerial skills that will affect the worker’s opportunity for profit or loss.

3. How does the worker’s relative investment compare to the employer’s investment? A worker whose investments support a business enterprise above and beyond any particular project is more likely to be an independent contractor than an employee. If an employee makes an investment, that investment will most likely be for a particular project and will be marginal compared to the employer’s investment. Ultimately, comparing the worker’s investment to the employer’s investment will be the determinate factor.

4. Does the work performed require special skill and initiative? Technical skills or expertise are not definitive hallmarks of an independent contractor. Instead, a worker’s business skills, judgment and initiative demonstrate whether or not someone is using his or her skills for an employer or is in business for him or herself.

5. Is the Relationship between the Worker and the Employer Permanent or Indefinite? Generally, a worker’s schedule that is permanent or indefinite indicates an employee relationship because the worker’s time is largely pre-determined. This schedule represents the typical at-will employment relationship. On the other hand, an independent contractor will typically only work on one project at a time for an employer and does not necessarily work continuously. However, the key is whether the lack of permanence of indefiniteness can be attributed to the “operational characteristics intrinsic to the industry.” For example, part-time workers involved in seasonal industries lack permanence or indefiniteness for the portion of the year their industry is not operating. But, these seasonal workers would be considered employees for all other purposes.

6. What is the nature and degree of the employer’s control? The control factor should be analyzed in light of the ultimate determination of whether the worker is economically dependent on the employer or truly an independent business person. With that in mind, simply because an employer does not look over his workers’ shoulders does not mean that an employer-employee relationship does not exist. For instance, a flexible work schedule and little supervision ¬– alone – are not dispositive characteristics of an employer-employee relationship. Instead, the critical inquiry is the nature and degree of the alleged employer’s control.

In sum, most workers are probably employees under the FLSA’s broad definition of employment, “to suffer or permit to work.” The classification of employment is significant to not only the workers, but also the employers for the rights and protections afforded under the employment relationship.