The U.S. Department of Labor has recently issued a document (Administrator’s Interpretation No. 2015-1) that offers business owners additional guidance for properly classifying an “employee” vs. an “independent contractor.” The historic “economic realities” test, widely used by courts when determining a worker’s classification, consists of a number of factors that have over time been applied inconsistently and with certain factors given substantial weight over the others. The Administrator’s Interpretation does not change or reject the economic realities test, but rather sheds light on proper application of the test based on the circumstances.
In determining whether an individual is classified as an “employee” or an “independent contractor,” the DOL instructs that more attention and focus must be placed on the collective factors that make up the working relationship between an employer and its laborers, with no one factor being determinative. Additionally, the DOL emphasizes that most workers are employees under the Fair Labor Standards Act (FLSA) due to the statute’s broad definition of the term “employ.” The DOL’s Misclassification Initiative is therefore aimed at identifying those employees that are misclassified as independent contractors as a result of the manipulation of one or more factors of the economic realities test.
There are obvious advantages for an employer who classifies a worker as an independent contractor rather than an employee – less oversight, lower benefits-related costs, and reduced taxes, to name a few. Although independent contractor relationships can be advantageous for workers and businesses, some employees may be intentionally misclassified as a means to cut costs and avoid compliance with labor laws.
A recent case out of the 4th Circuit Court of Appeals helps to illustrate a stricter application of the economic realities test. In Butler vs. Drive Automotive Industries, No. 14-1348, a company that had hired a worker through a temporary employment agency was held liable in an employment discrimination action under the theory of joint employer liability. Despite the company’s measures to establish the individual as an independent contractor (e.g., she wore a staffing agency uniform, parked her car in the staffing agency area, and she was paid by the staffing agency), the plaintiff argued that she was supervised and evaluated by company employees and, therefore, worked for both the company and the employment agency. The Court agreed, finding that both the company and the staffing agency exercised control over various aspects of the individual’s employment. The Court held that a joint employer relationship existed among the parties and the company could be held liable as an employer despite its attempts to structure an arrangement with an independent contractor.
Implications
Clearly, the DOL is dialing up their attention and scrutiny in the classification of employees vs. independent contractors. Bottom line: Business owners will find the classification bar for “independent contractor” has been raised.
Administrator’s Interpretation No. 2015-1 provides guidance in the form of examples and citations to relevant case law for determining a worker’s status. Attorneys representing small businesses or their workers should review the document and share with your clients.
Are you clients aware of this? How are you advising your business clients in light of these changes? Tell us what you're hearing in the comments section.
