On July 15, 2015, the United States Department of Labor (“DOL”) issued administrator’s interpretation No. 2015-1, because it continues to receive numerous complaints from workers alleging that their employers have improperly classified them as “independent contractors” instead of “employees” to avoid paying them minimum wage or overtime pay in accordance with the Fair Labor Standards Act (“FLSA”).
The guidance document is just one part of the DOL’s initiative to curtail the misclassification of employees. As we reported last month, the DOL issued proposed revisions to the FLSA’s “White Collar” overtime pay regulations that, if enacted as proposed, will cause 4.6 million workers currently exempt from the FLSA’s overtime pay requirements to qualify for overtime pay.
The DOL reports that the misclassification of “employees” as “independent contractors” deprives workers of the protections of a minimum wage, overtime pay, unemployment compensation, and
workers’ compensation benefits and also results in lower tax revenues for the government.
The DOL issued this guidance to assist employers with this classification process to ensure that workers are properly classified. The DOL reminds employers the FLSA’s definition of “employ” is intentionally broad to ensure that more workers are classified as “employees” subject to the FLSA’s minimum wage and overtime pay provisions.
To determine whether an employer has properly classified a worker as an “employee” or “independent contractor,” the DOL and courts use a set of six factors commonly referred to as the “economic realities test.” This multi-factored test is designed to measure whether an employee is economically dependent upon an employer or whether he/she is in business for him/herself. If an employee is economically dependent on an employer, he/she must be classified an “employee” and is subject to the FLSA’s minimum wage and overtime pay requirements.
The economic realities test factors typically are: (1) the extent to which the work performed is an integral part of the employer’s business; (2) the worker’s opportunity for profit or loss depending upon his managerial skill; (3) the extent of the relative investments of the employer and the worker; (4) whether the work performed requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer.
The DOL reminds employers that the FLSA’s intended expansive coverage for workers must be considered when applying the economic realities test. No one factor is determinative. Instead, the factors must be considered in totality to determine whether a worker is economically dependent on the employer.
The DOL warns employers that the factors should not be applied as a checklist, but rather the outcome must be determined by a qualitative rather than quantitative basis. As an aside, the DOL noted that this guidance can also be applied to determinations as to employee status under the Family Medical Leave Act (“FMLA”), as the FMLA adopted the same definition of “employ.” However, note that the IRS, which audits employers for underreported taxes, uses a different “degree of control” test for determining independent contractor status, which it recently streamlined from twenty factors down to three.
Finally, the Illinois Department of Employment Security (“IDES”) uses its own test to determine whether an individual is an independent contractor or an employee with regard to eligibility for unemployment benefits. Employers could find themselves paying unemployment benefits on behalf of “independent contractors” if the IDES finds an employment relationship to have existed under its test.
In light of the recent activity of the DOL and IRS in this area, school districts should re-examine each of their independent contractor relationships to ensure that they have properly classified their workers as independent contractors. Contact John DiJohn with your FLSA inquiries.