Misclassifying Employees as Independent Contractors

by | Jul 17, 2015

Misclassifying Employees as Independent Contractors

How to Avoid Noncompliance with DOL Guidelines

Contingent worker use has been on the rise for years. Indeed, many employers nimbly and effectively turn the use of free agents into a competitive edge by augmenting full-time workers with freelancers, independent contractors, and consultants who possess targeted skills and offer flexible availability.

Yet, according to the U.S. Department of Labor (“DOL” or “department”), numerous employers misclassify employees as independent contractors. The DOL deems the issue a serious problem that harms the U.S. economy at large, as well as employers and workers. As such, the department has cracked down on misclassifications and, most recently, issued additional guidance for employers on how to properly classify workers. “Administrator’s Interpretation No. 2015-1,” issued by DOL Administrator David Weil, urges employers who use independent contractors to reevaluate whether those individuals are classified properly under the Fair Labor Standards Act (FLSA).

The Problem with Misclassifying Employees

The FLSA exists to protect employees. Yet, in instances where would-be employees are misclassified as independent contractors, they miss out on a range of entitlements. These include overtime pay, access to health coverage, job-protected leave, and various legal protections. In an effort to identify employers who misclassify employees as independent workers, the DOL has stepped up its investigations—particularly around the issue of misclassifications that appear to be intentional.

This uptick in investigations has many employers wondering whether they could be misclassifying workers accidentally—leaving the organization vulnerable to penalties, lawsuits, and brand degradation. It’s a valid question, especially because the recent Administrator’s Interpretation notes that “most workers are employees under the FLSA’s broad definitions.”1 Indeed, under 29 U.S.C. § 203(g), to employ someone simply means to “suffer or permit to work,” a definition that is both expansive and vague.

How to Avoid Misclassifying Employees as Independent Contractors

To avoid misclassification, the DOL urges employers to properly evaluate the employment relationship through the historic lens of the six “economic realities” factors identified by the Supreme Court. While no single factor is regarded as controlling, but rather a series of considerations that must be given equal weight, they provide keen insight regarding the distinctions between employees and independent contractors.

These factors include circumstances such as whether the work being performed is essential to the business, whether the worker is economically dependent on the employer, and how much control the employer has over issues of pay, work hours, and how the work is performed (whether the worker does the work himself or herself, or is free to hire subcontractors.) Furthermore, just because a worker’s relationship to the business is considered impermanent or indefinite does not, in and of itself, indicate that the worker should be classified as an independent contractor.

In order to ensure compliance with the FLSA, employers must consider the relationship of each worker and the business while bearing in mind the government’s broad interpretation of what it means to be an employee, as opposed to an independent contractor. Ultimately, it is the employer’s task to determine whether each worker is, essentially, in business for himself or herself … or whether he or she is economically dependent on the employer. While all six economic realities factors should be considered equally, and not be analyzed mechanically, the DOL points out that the issue of economic dependence is the “ultimate question.”

Moreover, while it can be challenging to determine the status of individual workers, it is in each employer’s best interest to classify them correctly, as the fines and costs associated with misclassification are steep. For further assistance classifying your workers, read the Administrator’s Interpretation No. 2015-1 in its entirety and consult with your organization’s legal counsel.

1 U.S. Department of Labor. Wage and Hour Division. “Administrator’s Interpretation No. 2015-1.” July 15, 2015. (http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.pdf)

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