Labor and Employment Law

Department of Labor Aims to Crack Down on Employer Misclassification of Employees

 by Anthony Kuchulis

The U.S. Department of Labor (“DOL”) recently issued Administrator’s Interpretation No. 2015-1 (the “Guidance”) asserting that employers are increasingly misclassifying their workers as “independent contractors” rather than “employees.”   The DOL asserts that most workers are employees for purposes of the Fair Labor Standards Act (“FLSA”).  The DOL is combating what it believes to be employers taking advantage of the economic benefits of classifying workers as independent contractors.  For example, independent contractors are not subject to the FLSA, which includes regulations governing minimum wage, overtime compensation, unemployment insurance, and worker’s compensation benefits.  Other benefits for workers classified as employees are that they have the benefit of workplace safety regulations and can bring claims for discrimination under Title VII, benefits not afforded to independent contractors.     

In addition, the DOL is collaborating with the IRS in 22 states to collect taxes where employers have misclassified employees as independent contractors.  In 2014 alone those investigations resulted in more than 109,000 workers being reclassified as employees and the collection of $79 million in back wages and penalties.  Washington and California have active enforcement partnerships with the DOL and IRS.  Oregon does not, but that may change.

The Guidance outlined the DOL’s interpretation of the “economic realities test,” which is commonly used by courts to evaluate whether an employee has been misclassified as an independent contractor.  While the Guidance is not binding on courts, it does cite numerous court opinions for support and it would likely be persuasive to a judge attempting to rule on the proper classification of a worker.  The factors of that test, as outlined below, are simply a framework for courts to use to evaluate worker classification.  The factors are not applied in a mechanical way and ultimately employee classification is a judgment call for the court based on the totality of the circumstance.  The factors are:

  1. Is the work an integral part of the employer’s business? 
    The key here is whether the worker is engaged in work that is a key to the employer’s core function. For example, courts have found that cake decorators are integral to the custom cake business.
  2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss? 
    The analysis here is whether the worker’s management of his or her business has a significant effect on the worker’s bottom line. 
  3. How does the worker’s relative investment compare to the employer’s investment?  
    Here the court would review whether the worker is making investments to expand his or her business or gain clients.  
  4. Does the work performed require special skill and initiative? 
    This relates to a worker’s business skills, judgment, and initiative, not his or her technical skills. 
  5. Is the relationship between the worker and the employer permanent or indefinite? 
    If a worker stays on a job until he or she quits or is fired, then it is more likely an employee-employer relationship. 
  6. What is the nature and degree of the employer’s control? 
    An independent contractor would have meaningful control over aspects of the work performed so that he or she is economically independent and a true business person. 

The DOL candidly asserts multiple times in the Guidance that it interprets the above-listed factors as broadly as possible to capture as many workers into the category of employee as possible.  In fact, the Guidance uses the term “broad” or “broadly” 16 times.  If an employer is found to have misclassified workers, it can be civilly liable for the payment of back taxes, back wages, and other penalties.  Finally, the FLSA includes a private right of action, so even if the DOL does not file claims against an employer, an employee may bring an individual claim to be reclassified under the FLSA and receive the benefits mentioned above.   

The Guidance does not alter independent contractor analysis under various state laws, including Oregon’s, which employ their own tests for independent contractor classification.  Nevertheless, employers should review their policies and guidelines with respect to the classification of workers carefully to avoid potential exposure based on the DOL’s new Guidance as well as state law.  Should you have any questions, as always, we are here to help.

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Electronic Alerts are written by Barran Liebman attorneys for their clients and friends. Alerts are not intended as legal advice, but as employment law, labor law, and employee benefits announcements.

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