The U.S. Department of Labor has launched two major initiatives designed to encourage individual workers who are contract service providers to bring misclassification claims and lawsuits. According to the Department, “most workers” are “employees” covered by the Fair Labor Standards Act (FLSA) and other “important workplace protections.” USDOL considers the on-demand or sharing economy model to be pernicious. Accordingly, the Department has released extensive new guidance underscoring that independent contractor misclassification remains a top enforcement priority. It is also launching a new outreach program to encourage individual workers to challenge their independent contractor status.

USDOL Administrator’s Interpretation No. 2015-1

The basic framework for identifying independent contractor status under the wage/hour law has been relatively consistent for many years. USDOL has long had a Fact Sheet outlining its enforcement position. Courts have not always agreed on one standard test. But, the underlying premise has always been the same: A multi-factor test focusing on whether the worker is economically dependent on the employer, considering the “economic realities” of the situation, as opposed to truly being “in business for him or herself”.

On July 15, 2015, the USDOL reiterated this analysis in a lengthy Administrator’s Interpretation No. 2015-1, which sets forth six non-exclusive factors that should be used to determine if an individual qualifies as an employee rather than an independent contractor.

  1. Is the work an integral part of the employer’s business?
  2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
  3. How does the worker’s relative investment compare to the employer’s investment?
  4. Does the work performed require special skill and initiative?
  5. Is the relationship between the worker and the employer permanent or indefinite?
  6. What is the nature and degree of the employer’s control?

The outcome turns more on the number and weight of the factors as they relate to the ultimate question of economic dependence, than to an employer’s control over the worker. No one factor is dispositive. And, because the application of the criteria can be subjective, outcomes vary depending on the judge deciding the case.

Why Does the Administrator’s Interpretation Matter?

The USDOL’s guidance is less about definitions and more about enforcement emphasis. The six factors are not new. What the guidance does is bring more attention to this issue and create an easy-to-use template for just about any plaintiff’s lawyer to craft a claim. It also underscores that USDOL is has made independent contractor misclassification a priority and is committed to expending significant resources to attack business models using contractor service providers. Accordingly, businesses relying on contract service providers now, more than ever, need to carefully assess their contractor relationships.

USDOL Outreach to Workers

Several days after the issuance of Administrator’s Interpretation No. 2015-1, Wage and Hour Division Administrator David Weil held a press conference in which he stated that WHD would use its community outreach resource planning specialists (CORPS), which are recently created positions in more than half of the 52 WHD district offices around the country, to connect with workers and give them information to help them “understand” that they might be misclassified.

Business Risk Management

Given the costly consequences of misclassification (e.g., payroll taxes, OT pay, Affordable Care Act, FMLA, and other statutory rights), employers need to realistically assess their contractor relationships and actual work practices to determine whether changes are needed to reduce the risk of misclassification. Because this is a high risk situation, businesses should use an attorney to conduct the review so that the process and results will be protected by the attorney-client privilege. Also, businesses need to understand that multiple tests for independent contractor status exist in other federal, state, and local laws. Thus, compliance with the FLSA test alone is not necessarily sufficient.

Sample best practices include:

  • Do business only with a business entity that has a business license. Make payment to the business entity.
  • Whenever possible, only contract with a business that has its own employees and allow the business to decide which employee or employees will do the work.
  • Emphasize and clarify the difference between the company’s business and the contract service provider’s business. Be prepared to show how the service provider can continue or expand business with or without a contract with the company.
  • Be sure that actual practices align with the language in the contract.
  • Rely on brand justification or industry best practices when outlining contract requirements.
  • Do not finance the contractor’s business or provide equipment and supplies.
  • Do not restrict a contractor from working for others; allow for and facilitate the ability of the contractor to work for others.
  • Limit the duration of the contract and the ability to automatically renew.
  • Pay attention to and use contract terminology, not employment terminology.
  • Do not control the details of how work is performed.
  • Consider including an arbitration agreement and class action waiver.