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DOL Guidance On Misclassification Of Independent Contractors – Another Reminder To Evaluate Independent Contractor Relationships

A reminder of the need to properly structure, document and implement independent contractor relationships hardly seems necessary – the classification of workers as independent contractors has been attacked by legislatures, federal and state agencies, the courts and plaintiffs’ class action lawyers for at least half a decade – yet another reminder came this week from the U.S. Department of Labor (DOL) in the form of an interpretation by the administrator of the Wage and Hour Division on the application of the standards for determining who is an employee under the Fair Labor Standards Act (“FLSA”).

The Interpretation, which as guidance is technically not binding on courts, certainly makes clear the DOL’s position that most workers are considered employees under the FLSA due to the FLSA’s broad definition of the term “employ” (and consequently, under the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act, which both adopt the FLSA definition of “employ”). While an initial reaction of employers may be to change the status of even those workers properly classified as independent contractors in order to avoid DOL scrutiny, reclassification carries the risk that the workers themselves and federal and state agencies may view the reclassification as an indication that the workers had been misclassified. Instead, employers should undertake a comprehensive review of their independent contractor relationships to determine the level of compliance and to assess the risks of liability of maintaining, or changing, a worker’s status.

The Interpretation notes that the multi-factor “economic realities test” is applied to determine whether a worker is an employee or an independent contractor under the FLSA and according to the Interpretation, the economic realities test should also be applied to workers who are owners, partners and members of a limited liability company to determine if they are in fact FLSA covered employees. The Interpretation discusses the factors typically included in the economic realities test: (A) the extent to which the work performed is an integral part of the employer’s business; (B) the worker’s opportunity for profit or loss depending on the worker’s managerial skill; (C) the extent of the relative investments of the employer and the worker; (D) whether the work performed requires special skills and initiative; (E) the permanency of the relationship; and (F) the degree of control exercised or retained by the employer. Peppered throughout the Interpretation are reminders that the control factor, a dominant factor in the “control test” which is applicable to the independent contractor analysis under other laws, is not determinative of whether a worker is an employee or an independent contractor. Rather, the Interpretation boils down the independent contractor analysis under the FLSA to whether the worker is economically dependent on the employer (thus, an employee) or is truly in business for him or herself (thus, an independent contractor).

The examples provided in the Interpretation following the discussion of each economic realities test factor illustrate the difficultly in structuring independent contractor relationships that will withstand a claim for violation of the FLSA. One example notes that a highly skilled carpenter who provides a specialized service (such as custom, handcrafted cabinets made to order) for a variety of area construction companies and who determines when to order materials, the quantity of materials to order, and which orders to fill may be demonstrating the skill and initiative of an independent contractor. This example is contrasted with a highly skilled carpenter who provides his skilled labor on a jobsite and is told what work to perform where. This worker is considered an employee because business skills, judgment and initiative are not exercised. The reality, which is not lost on the DOL, is that the circumstances contained in the second example, that of an employee, are the more likely to exist.

If you need assistance structuring, documenting or implementing your relationship with independent contractors, please contact Jeffrey M. EmbletonAmy L. KullikJames A. Budzik or Ann E. Knuth in our Labor and Employment Group at (216) 523-1500.

 

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