DOL’s New Interpretation of the FLSA Test will eliminate Independent Contractor Status for Most Workers

By Bruce E. Buchanan, Siskind Susser PC*

On July 15, the U.S. Department of Labor (DOL) issued an Administrator’s Interpretation entitled “The Application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who Are Misclassified as Independent Contractors.”  It re-visits the test to determine if an individual is an employee or an independent contractor and concludes “most workers are employees” under the FLSA because “employ” means “to suffer or permit to work”, which is intended to extend the FLSA’s coverage to the broadest extent possible.  Furthermore, the DOL explains the “economic realities test” should be applied in a way that extends the FLSA’s coverage to most workers.

New Economic Realities Test

The Interpretation gives added weight to whether a worker performs functions integral to an employer’s business, with one factor being whether a worker performs the same work that a company is in business to provide. The Administrator’s Interpretation describes this factor as “compelling” and explains that “integral work” may include that which “is just one component of the business and/or is performed by hundreds or thousands of other workers” whose work may be “the same as and interchangeable with many others’ work.” The DOL further asserts such work may be integral “even if it is performed away from the employer’s premises, at the worker’s home, or on the premises of the employer’s customers.”

Concerning an employee’s ability to impact the opportunity for profit or risk of loss, the DOL seeks to limit this inquiry to the “managerial” tools that can be applied to impact profit or loss. Now, according to the DOL, a “worker’s ability to work more hours” and the worker’s substantive “skills” have no bearing on the analysis, because it does not relate to “the worker’s managerial skill.” The DOL concludes the profit or loss experienced by an independent contractor generally must extend “beyond the current job” to “additional business from other parties” or other future work.

The DOL asserts the traditional analysis of the level of a worker’s investment in equipment or materials for the task now should be a comparison of the worker’s relative investment compared to that of the employer. According to the DOL, the worker’s investment, no matter how large, must be compared to the employer’s overall investment, not just that which is dedicated to “the particular job performed by the worker.” According to the DOL, “investing in tools and equipment is not necessarily a business investment or a capital expenditure”; instead, it may simply be necessary to perform the specific work.

According to the Administrator’s Interpretation, “[e]ven specialized skills do not indicate that workers are in business for themselves.” Rather, workers with specialized technical skills may be considered independent contractors only if those workers exercise “business skills, judgment, or initiative” in “operat[ing] . . . independent businesses, as opposed to being economically dependent on their employer.”

The Administrator’s Interpretation’s guidance on the impact of a permanent or indefinite relationship is that “permanence or indefiniteness” in a relationship “suggests that the worker is an employee,” but “a lack of permanence or indefiniteness does not automatically suggest an independent contractor relationship.”

Finally, the DOL gives the question of an employer’s control minimal weight. The Administrator’s Interpretation states that neither working offsite nor controlling one’s own hours, nor having little supervision, is “indicative of independent contractor status.”

Takeaways

It is unclear if and how courts will accept the DOL’s new guidance. If it is accepted by courts, the Administrator’s Interpretation presents significant new risks to companies that use independent contractors, particularly those who can be argued to be integral to a company’s business. Thus, all employers should evaluate their independent contractor relationships and determine whether they may be misclassified.

* Bruce E. Buchanan is an attorney at the Nashville and Atlanta offices of Siskind Susser, PC, where he primarily represents employers in employment/labor and immigration law matters, with a special emphasis on employer compliance.  Mr. Buchanan received his law degree from the Vanderbilt University School of Law in 1982. Before going into private practice in 2003, he served as senior trial specialist for the National Labor Relations Board.  Mr. Buchanan also served for 12 years as Adjunct Professor at William H. Bowen UALR School of Law, where he taught employment law, including wage and hour, and labor law.

Mr. Buchanan is a regular columnist for HR Professionals Magazine as well as the editor of the Tennessee Bar Association’s Labor & Employment Law Newsletter and Immigration Law Section Newsletter. He is admitted to practice in Georgia, Tennessee, Florida, and Arkansas, and before the U.S. Court of Appeals for the Fifth, Sixth, Eighth, and D.C. Circuits.

 

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