Employment Law Blog

Surprise! That Independent Contractor is an Employee!

The Department of Labor (“DOL”) has given employers some bitter pills to swallow lately, especially in light of the proposed rule concerning new restrictions on the white collar overtime exemption. With a new set of guidance on the classification of independent contractors, the streak of DOL heartburn for employers continues unabated.

On July 15, DOL Administrator David Weil issued an Administrator’s Interpretation that said “most workers [who are classified as independent contractors] are employees under the FLSA’s broad definitions.” The guidance turns on language in Fair Labor Standards Act (“FLSA”) that the word “employ” is defined to include “to suffer or permit to work.” This definition, along with the “economic realities” test espoused by the Supreme Court and the Circuit Courts of Appeals, broadens the scope of workers covered by FLSA, preempting the common law “control” test which looked only to the employer’s control over the worker.

Under the “economic realities” test, several factors affect the analysis of the employee-worker relationship, such as the extent to which the work is an integral part of the employer’s business, the worker’s opportunity for profit or loss, the extent of the investments of the employer and the worker, whether the work requires special skills, the permanency of the relationship and the degree of control exercised by the employer. Under this set of factors, courts generally regard independent contractors as those who operate a separate business and are economically independent from the employer. Those who are economically dependent on the employer are employees where the FLSA is concerned, according to the DOL guidance.

The guidance concludes that the FLSA’s language of “to suffer or permit to work,” interpreted through the “economic realities” test, is significantly broad, and as a result, the DOL concludes that most workers are employees under the FLSA. The defining question in this calculus is whether the worker is truly in a separate business that is independent economically from the employer. If the worker is economically dependent on the employer, the worker is an employee in the DOL’s eyes.

The dangers of misclassification of employees are numerous (and the subject of another McBrayer blog post), and this new guidance gives insight into how the DOL will view employee and independent contractor classification going forward. Employers that rely heavily on independent contractors or hire workers as individual independent contractors in particular should review those work arrangements with the factors of the “economic realities” test in mind, as well as consider the consequences of not adding those workers to the employee roster. For assistance with classification of employees, or for more information on the importance of employee classification, contact the attorneys of McBrayer.

Cynthia L. Effinger, attorney with McBrayer law is located in the firm’s Louisville office. Ms. Effinger’s practice is concentrated in the areas of employment law and commercial litigation. Her employment law practice is focused on drafting employment manuals and policies, social media, wage and hour, non-compete agreements and workplace discrimination. Ms. Effinger can be reached at ceffinger@mcbrayerfirm.com or (502) 327-5400, ext. 2316.

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This article does not constitute legal advice.