Are Your Independent Contractors Actually Employees?

On July 15, 2015, the U.S. Department of Labor – Wage and Hour Division issued Administrator’s Interpretation 2015-1, addressing the distinction between employees and independent contractors and articulating the standards that should be used when classifying workers, accordingly.

The Wage and Hour Division of the Department of Labor (WHD) is responsible for enforcing the Fair Labor Standards Act (FLSA), which concerns – in part – the classification of workers as either employees or independent contractors. Interpretation 2015-1 clarifies that under the FLSA, whether a worker is an employee or independent contractor depends on whether the worker is economically dependent on the employer or in business for him or herself. The more economically dependent a worker is on his or her employer, the more likely it is he or she is an employee. To the contrary, when a worker is in business for him or herself, it’s more likely that the he or she may be an independent contractor. The new Interpretation clearly articulates that under FLSA standards most workers are employees, not independent contractors, regardless of any agreement that may exist between workers and businesses which defines the relationship differently.

The Test

Under the new Administrator’s Interpretation, determining whether a worker is economically dependent (and, thus, and employee) or in business for him or herself (and, thus, and independent contractor) turns on the answers to the following six questions. The questions are to be considered collectively to indicate the totality of the circumstances – the economic realities of the working relationship – and no one factor should be given any more weight than any other.

– Is the work performed an integral part of the employer’s business? Generally, the more integral the work is to the employer’s business, the more likely it is that the worker is an employee.
– Does the worker’s managerial skill affect his or her opportunity for profit or loss? The more the worker’s managerial skill (business skill) affects his or her opportunity for profit or loss, the more likely it is that the worker may be an independent contractor.
– How does the worker’s relative investment in the business compare with the employer’s investment? Generally, the more substantial the worker’s investment in the business, the more likely it is that the worker is an independent contractor.
– Does the work performed require special skill and initiative? Generally, the more business skill, initiative, and business judgment that a worker exercises, the more likely it is the worker is an independent contractor.
– Is the relationship between the worker and the employer permanent or indefinite? Generally, permanency or indefiniteness (such as an at-will employment relationship) suggests that the worker is more likely to be an employee. To the contrary, if worker contracts with an employer to perform a single project, it’s more likely that the worker may be an independent contractor.
– What is the nature and degree of the employer’s control? Generally, the more control an employer exercises over the worker, the more likely it is that the worker is an employee.

The Interpretation emphasizes that ultimately, the FLSA’s “very broad definition of employment” and its “intended expansive coverage for workers must be considered when” examining the above questions, concluding that “most workers are employees under the FLSA’s broad definitions.”

For help understanding what this Interpretation means for your business, determining whether your independent contractors are properly classified, and planning to mitigate the risk of misclassification, contact the experienced attorneys at Miller & Steiert.