Employment Law Update

Earlier this month, the U.S. Department of Labor (DOL) announced proposed regulations that will redefine the white collar exemptions and increase the number of employees entitled to overtime. Click here to view our last bulletin. Last week, the DOL's Wage and Hour Division (WHD) declared war on what it calls "the misclassification of employees as independent contractors." The Administrator of the WHD issued an Administrator's Interpretation ("AI") setting forth the DOL's position on the subject.

An AI has less legal significance than formal regulations, which require notice to the public and a comment period before they are adopted. But, the AI represents the position of the federal agency charged with enforcing the nation's employment laws and can be expected to have a major impact on the way businesses classify workers. It is clear that the DOL considers addressing misclassification to be a top priority and the AI is part of its increased compliance efforts.

The Parties' Agreement Does Not Govern the Determination of Contractor Status

While it can be helpful to sign an agreement with a worker - or preferably the worker's corporation or other business entity - in which the parties state that the worker is an independent contractor (and not an employee), such an agreement is not legally determinative of the worker's status. The AI states: "[A]n 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 AI notes that under the federal wage and hour laws, an employee is not permitted to waive employee status.

Economic Realities Test

In the DOL's view, most workers are employees, unless they have their own business and the entity engaging the worker is one of the business's customers. In the AI, the DOL cites an "economic realities" test based on six factors to determine whether workers have sufficient economic independence. The AI states that "[T]he ultimate inquiry under the [federal wage and hour law] is whether the worker is economically dependent on the employer or truly in business for him or herself." The AI states that no one factor is controlling and notes that additional factors may be relevant in a particular case. The six factors are:

1. The extent to which the work performed is integral to the business of the entity to which the worker provides services;
2. Whether the worker's managerial skills affect his/her opportunity for profit and loss;
3. The relative investments in facilities/equipment by worker and the entity;
4. Whether the work performed requires business skills (as opposed to technical skills), judgement and initiative;
5. Whether the worker's relationship with the entity is "permanent or indefinite" (the AI states that "permanency or indefiniteness … suggests that the worker is an employee"); and
6. The nature and degree of control exercised by the entity. (The AI states that the control factor is not determinative or even the most important factor.)

In recent years, there has been a significant increase in the number of lawsuits filed under the federal wage and hour laws and the AI will likely contribute to that trend. The DOL has been clear in stating that it intends to use "strategic enforcement" efforts to "create ripple effects that impact compliance far beyond the workplaces where we physically conduct investigations, or the organizations to which we provide outreach directly." In other words, by publicizing enforcement actions against large, highly visible employers and industries, the DOL's actions are likely to increase awareness of the issue and the AI will encourage lawsuits against companies and organizations for misclassification and be cited to support the plaintiff's position.

Legal claims (and potential liability) as a result of misclassification can arise in a number of areas, including:

• Overtime – if the worker works more than 40 hours in a week.
• Affordable Care Act – if the worker works an average of 30 or more hours per week.
• Benefits – if the worker later seeks coverage under the company's employee benefit plans.
• Taxes – if the worker does not pay income taxes or FICA.
• Workers' compensation – if the worker is injured.
• Unemployment – if the worker files a claim after the termination of the relationship.
• Tort liability claims of third parties.
• Claims under various other employment laws – FMLA, discrimination laws, wrongful termination, etc.

Exposure to overtime claims often poses the largest potential liability, particularly since entities generally do not keep records of the hours worked each week by independent contractors.

First Step

It may take years to know whether the courts will accept the DOL's expansive view of employee status. Rather than waiting for a claim, entities should proactively review their independent contractor relationships to assess their exposure to potential liability for misclassification. Given the numerous factors involved in determining the legal status of a worker, the best approach is to look at the specific facts of each independent contractor relationship.

If you would like our assistance in reviewing your classification of workers as independent contractors, assessing your exposure to potential liabilities for misclassification, and considering actions to reduce the risks, please contact: