Today, and hot on the heels of the U.S. Department of Labor's (DOL's) proposed revisions to the overtime regulations, DOL Wage and Hour Administrator Dr. David Weil has issued a new Administrator's Interpretation (No. 2015-1) which concludes that, "most workers are employees under the FLSA's broad definition."
Contending, among other things, that the misclassification of employees as independent contractors results in lower revenues for government, the DOL Interpretation strongly embraces the "economic realities" test, which focuses on whether the worker is economically dependent on the employer or in business for himself.
Noting that the multi-factor test should not be applied mechanically or as a checklist, and that no one factor is outcome determinative, the DOL identified and explained the factors as follows:
- Is the worker an integral part of the employer's business? A true independent contractor's work is unlikely to be integral to an employer's business.
- Does the worker's managerial skill affect the worker's opportunity for profit or loss? The focus on this factor is whether the worker exercises managerial skills and whether those skills affect the worker's opportunity for both profit and loss.
- How does the worker's relative investment compare to the employer's investment? Even a substantial investment by the worker may not indicate independent contractor status, and the worker's investment must be compared to the employer's investment.
- Does the work performed require special skill and initiative? The fact that workers are skilled is not in and of itself indicative of independent contractor status.
- Is the relationship between the worker and the employer permanent or indefinite? Permanency suggests that the worker is an employee, but the lack of permanency does not automatically suggest an independent contractor relationship.
- What is the nature and degree of the employer's control? The worker must control meaningful aspects of the work performed to indicate he is conducting his own business. This factor alone should not be overemphasized.
In short, and in light of the potential penalties related to the misclassification of employees as independent contractors, employers should revisit their independent contractor agreements and arrangements periodically to ensure proper classification.