The Administrator of the U.S. Department of Labor (“DOL”) recently issued a new interpretation concerning the proper legal standard to determine whether an individual has been misclassified as an independent contractor instead of an employee. The administrator’s interpretation began with a brief review that the Fair Labor Standards Act (FLSA) has a definition of employ as “to suffer or commit to work.” This definition clearly covers more workers as employees, according to the DOL.
Economic Realities Test
In more recent times, courts have applied the “economic realities test” to determine whether an individual is an employee under the Fair Labor Standards Act.
The DOL interpretation notes that all factors of this tests must be considered in each case and no one factor is determinative of whether a worker is an employee. Ultimately, the goal is not simply to tally which factors are met, but to determine whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor).
An entity “suffers or permits” an individual to work, if as a matter of economic reality, the individual is dependent on the entity. The determinative factors typically include whether the individual’s work is an integral part of the employers business. For example, the work performed by a cake decorator is obviously integral to the business of selling cakes which are custom decorated. A true independent contractor’s work, on the other hand, is unlikely to be integral to the employee’s business.
The second factor is whether a worker’s managerial skills affect the worker’s opportunity for profit or loss. A worker in business for him or herself faces the possibility to not only make a profit, but also to experience a loss. On the other hand, the worker’s ability to work more hours and the amount of work available from the employer have nothing to do the worker’s managerial skills and do little to separate employees from independent contractors – both of whom are likely to earn more if they work more and there is more work available. Another important factor is how the worker’s relative investment compares to the employers investment. The worker should make some investment (and therefore undertake at least some risk for a loss) in order for there to be an indication that he or she is an independent business. For example, a federal court upheld that rig welders investments in trucks costing between $35,000 and $40,000 did not indicate that the rig welders were independent contractors when compared to the employer’s investment in this business, which exceeded hundreds of thousands of dollars of equipment at each worksite.
Another important factor is whether a worker’s business skills, judgment and initiative not his or her technical skills will aid in determining whether the worker is economically independent. Even specialized skills do not indicate that workers are in business for themselves, especially if those skills are technical and used to perform the work.
What is the Nature and Degree of the Employer’s Control?
As with the other economic realities factors, the employer’s control should be analyzed in light of the ultimate determination whether the worker is economically dependent on the employer or truly an independent business person. Control is only significant when it shows an individual exerts the control over a meaningful part of the business that he or she stands as an economic entity. The worker’s control over the meaningful aspects must be more than theoretical – the worker must actually exercise it.
In conclusion, the DOL continues to find that most workers are employees under the FLSA’s broad definitions. It is expected that the DOL will continue to focus its enforcement activities on the on-going topic of the correct classification as employees as workers or independent contractors.