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DOL Issues New Guidance on Misclassification of Independent Contractors

capitol-building-featuredOn July 15, the Department of Labor Wage and Hour Division (WHD) issued new guidance in the form of an Administrator’s Interpretation (No. 2015-1) (AI) on employee and independent contractor classification under the Fair Labor Standards Act (FLSA). The FLSA vaguely defines an “employee” as a person who is economically dependent on his or her employer and defines “employment” as to suffer or permit to work.

In the guidance, Wage and Hour Administrator Dr. David Weil attempts to clarify these definitions for employers and the courts, while also shedding additional light on WHD’s process for determining whether an independent contractor has been misclassified. Not surprisingly, the guidance pushes an expansive interpretation of FLSA coverage, concluding that “most workers are employees under the FLSA’s broad definitions.”

The AI states that WHD continues to rely on the “economic realities” test to determine whether an employer has correctly classified a worker as an employee or independent contractor. The test weighs “whether the worker is economically dependent on the employer or is really in business for him or herself.” According to the guidance, in making this determination WHD considers, among other things, the extent to which the worker is integral to the employer’s business; if the worker’s managerial skills affect his or her “opportunity for profit or loss;” the permanency of the employment relationship; and the amount of control the employer has over the worker.

Although an AI is sub-regulatory guidance and does not carry with it the force of a rulemaking issued with a formal notice and comment period — such as the recent DOL proposal to amend the “white collar” exemption regulations — courts may end up deferring to the AI and adopting its logic. The extent to which that might occur remains to be seen (for example, a court of appeals recently rejected WHD’s position on interns).

While the AI does not directly reference the new “gig” economy and related court battles on whether those working for Uber or similar companies are independent contractors or employees, the guidance seems to raise issues that are clearly relevant to that debate. Industries like construction, housecleaning, in-home care and trucking have been the most common employers found by the WHD to often misclassify their employees as independent contractors. The AI encourages WHD’s aggressive investigation of the use of independent contractors and has the potential to affect all employers that use independent contractors.

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