The all-time best The Far Side cartoon (based on an unscientific survey, sample size of me) is the one with two deer standing in the forest, one with a red circular target imprinted on its chest. The other deer says, “Bummer of a birthmark, Hal.”
Poor Hal. Blessed with the ability to walk upright, but cursed by that darned target.
In an Administrator’s Interpretation issued July 15, 2015, the Wage and Hour Division (WHD) of the Department of Labor placed a similar target on every company that uses independent contractors. If this describes your company, consider yourself to be Hal. You may be blessed with the ability to avoid paying withholding tax, providing workers’ compensation coverage, and offering employee benefits, but there’s also that darned target.
The Interpretation focuses on the (allegedly) rampant misclassification of workers as independent contractors, rather than employees. The expansive definition of “to employ” under the Fair Labor Standards Act (FLSA) is broader than the common law definition of who is an employee. The FLSA defines employ as “to suffer or permit to work,” a definition that sweeps in many workers who do not fit within the common law concept of employment.
The memo warns that “most workers are employees under the FLSA’s broad definitions.” The memo then provides a playbook for the plaintiffs’ class action bar on how to argue that independent contractors are misclassified and should actually be deemed employees under the FLSA.
According to the memo, independent contractors are individuals with economic independence, operating a business of their own. On the other hand, workers who are economically dependent on the company, regardless of skill level, are employees under the FLSA’s “very broad definitions.”
The memo details the “economic realities” test that determines whether a worker is an employee covered by the FLSA. If a worker is covered by the FLSA, all minimum wage and overtime rules apply, unless the worker is exempt. The standards for who is exempt are also about to change, further heightening the risk for companies deemed to have misclassified their workers.
Factors typically considered in determining whether an independent contractor is really an employee under the FLSA include:
- Is the work an integral part of the employer’s business?
- Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
- How does the worker’s relative investment compare to the employer’s investment?
- Does the work performed require special skill and initiative?
- Is the relationship between the worker and the employer permanent or indefinite?
- What is the nature and degree of the employer’s control?
The Administrator’s Interpretation devotes roughly a page to each of these factors, providing case law citations and a script for the plaintiffs’ bar on how to argue worker misclassification in an FLSA collective action.
We have seen a substantial rise in FLSA and other collective and class action filings that accuse companies of mislabeling employees as independent contractors. These lawsuits allege that workers treated as independent contractors are, in reality, employees when the proper definitions of “employee” are applied.
While it does not have the authority of a regulation and does not apply to claims under statutes other than the FLSA, the WHD’s memo will only help the plaintiffs’ bar and will encourage more of these lawsuits.
Bottom line: The government is not only encouraging further collective and class action filings against companies that use independent contractors, but also providing a script for the plaintiffs’ bar.