DCR has published a number of blogs cautioning against independent contractor misclassification. We have shared best practices, as the interpretation of the law has been a work in progress. Earlier this week, the Department of Labor (DOL) issued new guidance on factors to be considered when classifying workers. The action of the DOL does not redefine the factors to be considered in determining classification. Instead, it places greater weight on some than others. It reinforces the Wage and Hour Division’s position that most workers qualify as employees under the Fair Labor Standards Act (FLSA).
The DOL’s Misclassification Initiative has set forth a new determination of a worker as an employee or independent contractor. At the heart of the interpretation is a definition of employment as “suffer or permit work”. Using that definition, nearly every relationship qualifies as employment. That’s where the factors of the economic realities test come into play.
Let’s examine the shift in emphasis of each factor:
Is the Work an Integral Part of a Company’s Business?
Greater weight is given to whether the work being conducted is core to the company, or also being performed by regular employees. Less emphasis is placed on where the work is being performed – in fact, the DOL has stated that it doesn’t matter where the work is being done. This interpretation dramatically differs from legal interpretations in many recent court cases.
Does the Worker’s “Managerial” Skill Affect the Opportunity for Profit or Loss?
While in the past this area focused on the worker’s overall ability to control the profit of the engagement, the DOL has focused on managerial skills. The DOL believes that it is necessary for the worker to simultaneously be providing services to more than one client, but that alone is insufficient. The worker’s profit/loss must be viewed across all jobs, not any one single job. When a worker is truly in business for him or herself as an independent contractor, the worker should run the risk of losses on account of making misguided managerial decisions. Deciding whether or not to work more hours is not considered a skilled managerial decision.
What is the extent of the relative investments of the employer and the worker?
According to the DOL, “the worker’s investment in equipment and materials must be significant in nature and magnitude relative to the employer’s investment in its overall business to indicate that the worker is an independent businessperson.” The DOL states that the comparison must be made to the company’s overall investment – not just what is required to perform the specific project or job. When evaluating the investments of the worker, focus is on investments aimed at improving its ability to reduce its cost structure or extend its business plan. This is a difficult standard to meet, as the investment in R&D and facilities of most companies would be expected to be much higher than that of an individual. In addition, the investment required of many knowledge workers in roles such as IT is extremely low.
Does the work performed require special skills and initiative?
Emphasis in this area has shifted from the demonstration of specialized technical skills to the demonstration of business skills, judgement or initiative in operating their own independent business.
How permanent is the relationship?
The notion of “how long” remains an open question. While a “permanent relationship” implies an employer-employee relationship, a temporary relationship does not necessarily qualify the individual as an independent contractor. The deciding factor, according to the DOL, is whether the worker can determine the end date of the relationship.
What is the degree of control exercised or retained by the employer?
Historically, this factor has been given the greatest weight by the courts when considering misclassification. However, the DOL interpretation states that working offsite, controlling one’s own hours, and having little supervision is not indicative of independent contractor status. Control may be exerted due to the nature of the business, regulatory requirements and/or customer satisfaction. All these are viewed as indicative of an employee/employer relationship. The issue is determined by the amount of control exercised by the employer, and not why it is exerted.
Since the new guidance runs counter to much of the legal precedent, It is to be seen how this interpretation will affect court rulings in misclassification cases. If it is actually accepted by courts, the DOL’s Interpretation presents significant new risks to companies that use independent contractors.
Once again, we encourage companies to re-evaluate the status of their independent contractors using this interpretation. New measures may be required to protect against a spike in misclassification claims. Many companies may elect to entirely eliminate the risk through a policy of prohibiting the use of independent contractors.
While the DOL’s interpretation is intended to increase protections of many workers who are currently misclassified in order to avoid providing FSLA protections, is it possible that this will turn out to fall under the Law of Unintended Consequences? Will it stifle the growing number of workers who are choosing to work as freelancers and independent consultants but have no desire to transition their self-employed status into the foundation for a growing business?
Let’s hear your opinion.
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