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Department of Labor Administrator on Misclassification of Workers

The administrator of the Department of Labor’s wage and hour division, Dr. David Weil, this week issued an administrative guidance document aimed to curb the misclassification of workers as 1099ers or independent contractors rather than employees. We would urge that you review it carefully, especially those of you in the construction industry.

This document comes out in the middle of an on-going argument over the misclassification and mistreatment of workers as reported on here in previous posts. The document 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” is sure to create a number of new questions especially in the new economy workforce.

The document begins by defining Misclassification.

“Misclassification of employees as independent contractors is found in an increasing number of workplaces in the United States, in part reflecting larger restructuring of business organizations. When employers improperly classify employees as independent contractors, the employees may not receive important workplace protections such as the minimum wage, overtime compensation, unemployment insurance, and workers’ compensation. Misclassification also results in lower tax revenues for government and an uneven playing field for employers who properly classify their workers. Although independent contracting relationships can be advantageous for workers and businesses, some employees may be intentionally misclassified as a means to cut costs and avoid compliance with labor laws.”

This Administrator’s Interpretation then addresses each of the factors, providing citations to case law and examples. All of the factors must be considered in each case, and no one factor (particularly the control factor) is determinative of whether a worker is an employee. This was a prime determinant in the past, but seems to be broadened in this paper.

“The factors [for determining whether the worker is an employee or 1099er] typically include:
(A) the extent to which the work performed is an integral part of the employer’s business;
(B) the worker’s opportunity for profit or loss depending on his or her managerial skill;
(C) the extent of the relative investments of the employer and the worker;
(D) whether the work performed requires special skills and initiative;
(E) the permanency of the relationship; and
(F) the degree of control exercised or retained by the employer.”

In applying the economic realities factors, courts have described independent contractors as those workers with economic independence who are operating a business of their own. On the other hand, workers who are economically dependent on the employer, regardless of skill level, are employees covered by the FLSA. See, e.g., Hopkins v. Cornerstone Am., 545 F.3d 338, 343 (5th Cir. 2008) (“To determine if a worker qualifies as an employee, we focus on whether, as a matter of economic reality, the worker is economically dependent upon the alleged employer or is instead in business for himself.”);Baker v. Flint Eng’g & Constr. Co., 137 F.3d 1436, 1440 (10th Cir. 1998) (the economic realities of the relationship govern, and the focal point is whether the individual is economically dependent on the business to which he renders service or is, as a matter of economic fact, in business for himself).”

Moreover, the economic realities of the relationship, and not the label an employer gives it, are determinative. (Bold is used for emphasis.) Thus, an agreement between an employer and a worker designating or labeling the worker as an independent contractor is not indicative of the economic realities of the working relationship and is not relevant to the analysis of the worker’s status.”

“The ultimate inquiry under the FLSA is whether the worker is economically dependent on the employer or truly in business for him or herself. If the worker is economically dependent on the employer, then the worker is an employee. If the worker is in business for him or herself (i.e., economically independent from the employer), then the worker is an independent contractor.

The sections of the administrative paper are:

I. The Economic Realities Factors Should Be Applied in View of the FLSA’s Broad Scope of Employment and “Suffer or Permit” Standard

II. The Economic Realities Factors Guide the Determination Whether the Worker Is Truly an Independent Business or Is Economically Dependent on the Employer.

The questions that are to be applied in the determination are:

A. Is the Work an Integral Part of the Employer’s Business?
B. Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
C. How Does the Worker’s Relative Investment Compare to the Employer’s Investment?
D. Does the Work Performed Require Special Skill and Initiative?
E. Is the Relationship between the Worker and the Employer Permanent or Indefinite?
F. What is the Nature and Degree of the Employer’s Control?”

The key issues and recommendations are summed up in the conclusion.

In sum, most workers are employees under the FLSA’s broad definitions. (Bold added.)The very broad definition of employment under the FLSA as “to suffer or permit to work” and the Act’s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor. The factors should not be analyzed mechanically or in a vacuum, and no single factor, including control, should be over-emphasized. Instead, each factor should be considered in light of the ultimate determination of whether the worker is really in business for him or herself (and thus is an independent contractor) or is economically dependent on the employer (and thus is its employee). The factors should be used as guides to answer that ultimate question of economic dependence. The correct classification of workers as employees or independent contractors has critical implications for the legal protections that workers receive, particularly when misclassification occurs in industries employing low wage workers.” [Such as in the sub-sub contracting on construction projects]

For those of you in the construction industry, we would urge that you review this document and watch, as well, the dual employer aspects working through the court system today.