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Wednesday, July 15, 2015

DOL Claims Many Workers Misclassified

 By: Tommy Eden



On Wednesday the U.S. Department of Labor (DOL) issued guidance aimed at employers who misclassify employees as independent contractors. The DOL claims that most such workers qualify as employees under the Fair Labor Standards Act (FLSA), and not independent contractors, under their expansive definition of employment.

The DOL 15-page “administrator's interpretation” points out that under the FLSA, the key question is whether a worker is genuinely in business for him or herself, which makes that worker an independent contractor, or is economically dependent on the employer, going on to discuss six “economic realities factors” that guide the classification assessment. It is the DOL’s position that the Economic Realities Factors Should Be Applied in View of the FLSA’s Broad Scope of Employment and “Suffer or Permit” Standard.

The “DOL Economic Realities Factors Guide the Determination Whether the Worker Is Truly an Independent Business or Is Economically Dependent on the Employer” are as follows:
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?

These new administrator's interpretation comes two weeks after the DOL proposed a rule that would broaden federal overtime pay regulations to more than double the minimum salary threshold required to qualify for a “white collar" exemption under the FLSA.

The DOL claims that the above six factors should not be analyzed mechanically or in a vacuum, and no single factor, including control, should be over-emphasized.  Rather 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).  The above factors claims the DOL should be used as guides to answer that ultimate question of economic dependence.  The correct classification of workers as employees or independent contractors has critical legal implications, notes the DOL in their guidance.

Common Sense Counsel: Next time you are trying to decide how to properly classify someone, as an employee or an independent contractor, understand that the right to control the means and manner of performance is a key factor-with about 20 other factors to boot.  So ask yourself the following questions before you hire that person as a 1099 contractor and not an employee. This is truly where an ounce of prevention is preferred to a stiff DOL/IRS fine.


Tommy Eden is a partner working out of the Constangy, Smith & Prophete, LLP offices in Opelika, AL and West Point, GA and a member of the ABA Section of Labor and Employment Law and serves on the Board of Directors for the East Alabama SHRM Chapter. He can be contacted at teden@constangy.com or 334-246-2901. Blog at www.alabamaatwork.com with Links to “administrator's interpretation” on Blog.