The United States Department of Labor (DOL) has fired another salvo in its war of employee/independent contractor classification.
As most employers know, independent contractors are not subject to many of federal and state requirements.
These include minimum wage, overtime compensation, unemployment insurance and worker’s compensation requirements.
Employees, on the other hand, are subject to these and other federal employer obligations, with large financial impacts on employers.
The proper classification of workers is critical to avoid employer liability for back wages and other protections offered by federal and state labor laws.
A July 14, 2015 DOL Administrator’s Interpretation confirmed the DOL’s intent to pull back on a company’s ability to classify workers as independent contractors.
The DOL believes that employers are increasingly misclassifying workers as independent contractors, when they are really considered employees.
As the DOL’s Interpretation stated, “Most workers are employees.”
The Interpretation also raised a new test, the “Economic Realities Test,” to determine whether “the worker is economically dependent” on the employer, and so an employee, or “truly in business for him or herself,” and so an independent contractor.
This is a shift from the DOL’s longstanding “Control Test.”
That test, like its name, focused on the employer’s control over the worker. The more employer control, the greater likelihood of an employee relationship.
As with most legal tests, the Economic Realities Test comes down to the application of a series of factors:
- 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 employer permanent or indefinite?
- What is the nature and degree of the employer’s control?
These fact-based inquiries are more important than ever, given the DOL’s recent Administrative Interpretation.
The Interpretation, while not binding, will still impact a court in a relevant dispute.
For more information on the employee/independent contractor issue, contact your FOS attorney.
