In July, the Wage and Hour Division of the U.S. Department of Labor (DOL) declared war on what it calls "the misclassification of employees as independent contractors" by publishing an Administrator's Interpretation (AI) setting forth the DOL's position on the subject.
A. Written Agreements
While it can be helpful to sign a written 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.
B. 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. "[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."
Within this context, the AI suggests an "economic realities" test based on six factors to determine whether workers have sufficient economic independence. 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), judgment 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.)
Legal claims (and potential liability) as a result of misclassification can arise in a number of areas, including:
1. Overtime - if the worker works more than 40 hours in a week.
2. Affordable Care Act - if the worker works an average of 30 or more hours per week.
3. Benefits - if the worker later seeks coverage under the company's employee benefit plans.
4. Taxes - if the worker does not pay income taxes or FICA.
5. Workers' compensation - if the worker is injured.
6. Unemployment - if the worker files a claim after the termination of the relationship.
7. Tort liability claims of third parties.
8. Claims under various other employment laws - FMLA, discrimination laws, wrongful termination, etc.
D. 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.