As the boundaries and distinctions between who is an employee and who is an independent contractor become more and more blurred, the United States Department of Labor (DOL), Wage and Hour Division issued more insight into classification of workers in its Administrator’s Interpretation No. 2015-1. The DOL goes into an in-depth consideration of the court created “economic realities” test as it is applied to the Fair Labor Standards Act’s (FLSA)“suffer or permit” standard for identifying employees.
After review of the interpretation, readers are left wondering who the interpretation actually helps. The interpretation states that the FLSA’s “suffer or permit” standard for identifying employees is to be interpreted broadly, and that the economic realities factors are to be applied consistent with that broad standard.
[A] worker who appears to be in business for him or herself is likely to be an independent contractor, while a worker who is economically dependent on the employer is more likely to be an employee
At first glance, it appears the standards are interpreted in more of an employee-favorable way. The DOL’s administrator’s interpretation highlights the distinction between an employee and an independent contractor: a worker who appears to be in business for him or herself is likely to be an independent contractor, while a worker who is economically dependent on the employer is more likely to be an employee. Below is a brief synopsis of the economic realities factors as they are interpreted by the DOL.
Essentially, the DOL states that an employer “suffers or permits” a worker to work if the worker is dependent on the employer as a matter of economic reality. Cumulatively, the Supreme Court and the Courts of Appeals have developed the “economic realities” test composed of six factors to consider when interpreting whether a worker is an employee or an independent contractor.
The economic realities factors are to be utilized when determining whether a worker is an independent business or if they are economically dependent upon the employer.
Those six factors include: (1) how integral the work performed is to the employer’s business; (2) whether the worker has an opportunity for profit or loss based on their managerial skill; (3) the extent of investments made by the employer and the worker; (4) whether the particular work performed requests a special skill or initiative on behalf of the worker; (5) whether the relationship between the worker and employer is permanent or indefinite; and (6) what degree of control is exercised or retained by the employer. The economic realities factors are to be utilized when determining whether a worker is an independent business or if they are economically dependent upon the employer.
How integral is the work performed to the employer’s business? The more integral the work performed by the worker is to the employer’s business, the more likely that worker is an employee. However, the less integral the work performed by the worker is to the employer’s business, the more likely the worker is to be an independent contractor.
Does the worker have an opportunity for loss or profit based on their managerial skills? A worker’s managerial skills will often affect their opportunity for profit or loss beyond just the current job they are working on. Such examples of this may be leading to additional business from other parties or eve losing business or opportunities to perform work from other companies.
What investment is the worker making as compared to the employer? If the worker makes an investment that supports a business as a business outside of just the particular project, it is more likely the worker is an independent business, and therefore an independent contractor. However, it is important to note that the nature and extent of the investment made by the worker must be compared to the employer’s relative investment into the overall business, not just that one project the worker is working on.
Does the work require the worker to have a special skill or initiative? If a worker has a special technical skill, that does not in itself make the worker an independent contractor unless the worker has business skills that allow him to operate as an independent business, therefore making him not economically dependent on the employer.
Is the relationship between the worker and employer permanent? Permanency in the relationship suggests an employment relationship, whereas an independent contractor typically works on a single project for an employer and does not necessarily work continuously for that employer.
Does the employer or worker retain control? For a worker to be considered an independent contractor, the worker must control “meaningful aspects of the work” in a way that implies the possibility of the worker conducting his or her own business or acting in a way inconsistent with being economically dependent upon the employer.
[T]his broad interpretation provides for a more expansive coverage of workers as employees.
Generally, it appears that the standards help workers as employees as opposed to workers as independent contractors. The interpretations of these factors are done so in a broad manner, consistent with the FLSA. As such, this broad interpretation provides for a more expansive coverage of workers as employees. The definition of employee and independent contractor shifts daily and sometimes may vary by state. Employers should be cautious of these interpretations, and workers should celebrate.
These new classifications benefit workers in that they lead to the understanding that many more workers are being seen as employees. This means many more workers will be able to begin receiving benefits such as workers’ compensation coverage, coverage under the Americans with Disabilities Act (ADA), health coverage under the Affordable Care Act (ACA), and other protections afforded to employees that are not provided for workers classified as independent contractors.
But, could this lead to rearrangement in business practices and procedures for recruiting or general structuring internally that might harm workers? As the definition of employee becomes broader, and more types of workers are considered employees, will employers start becoming more and more concerned with how they are classifying their workers? Will this concern lead employers to reconsider whom they hire, how they hire, and the structure of the workers’ jobs and duties? While the effects of these continued changes in classification have yet to be seen, there may be room for concern for employers and employees.