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Client Alert: Department of Labor Narrows Independent Contractor Classification

The U.S. Department of Labor (DOL) is continuing to crack down on the misclassification of employees as independent contractors. In recently issued guidance, the DOL concluded that “most workers are employees under the FLSA’s broad definitions.” The DOL guidance defines “independent contractors” narrowly enough for many previously properly classified as independent contractors to now properly be classified as employees. According to Administrator’s Interpretation No. 2015-1 issued on July 15, 2015, worker classification should focus whether the worker is economically dependent on the employer. The common law “control test,” which has long been used to determine whether or not a worker is an employee or independent contractor, focused in large part on the degree of control the employer exercised over how, when and where work was performed. In this new guidance, the DOL has significantly downplayed the control test and instead focuses on economic dependence and a factually specific “economic realities” test focusing on the following six factors:

1. Is the work performed an integral part of the employer’s business? If work performed is integral to the employer’s business, it is more likely that the worker is economically dependent and an employee.
2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss? A worker in business for him or herself faces the possibility of experiencing a profit or loss based on managerial skills. This supports independent contractor status.
3. How does the worker’s relative investment compare to the employer’s investment? An investment by the worker in equipment or supplies for his or her own business supports independent contractor status. Company supplied materials and tools supports employee status.
4. Does the work performed require special skill and initiative? Specialized skills, initiative and business judgment support independent contractor status.
5. Is the relationship between the worker and the employer permanent or indefinite? Permanency or indefiniteness in the relationship with the employer suggests that the worker is an employee. 
6. What is the nature and degree of the employer’s control? When the employer controls how, when and where work is performed, it is more likely the worker is economically dependent on the employer and is an employee.

In undertaking this analysis, each factor is examined and analyzed in relation to one another. For example, the “control factor” (Bullet 6) is no longer given additional weight. The guidance to some extent has left employers with more questions than answers as no single factor will be determinative and the analysis is highly fact specific and based on each individual situation. However, the DOL’s recent guidance makes clear that the Fair Labor Standards Act (FLSA) should be interpreted broadly and in favor of determining that an employment relationship exists. To access the full content of Administrator’s Interpretation No. 2015-1, click here. If you have questions or concerns regarding the classification of your employees, we encourage you to reach out to Holly Hammer in Hutchison PLLC’s employment law group to discuss the facts specific to your situation and next steps.