On July 15, 2015, Administrator of the Wage & Hour Division of the US Department of Labor, David Weil, published the Administrator’s Interpretation No. 2015-1. “The Administrator believes that additional guidance regarding the application of the standards for determining who is an employee under the Fair Labor Standards Act (FLSA or “the Act”) may be helpful to the regulated community in classifying workers and ultimately in curtailing misclassification.”
The Interpretation initially observes the FLSA’s definition of “employ” as “to suffer or permit to work” and the “economic realities” test provide a broader scope of employment that the common law “control” test. It begins with background information on the misclassification of employees as Independent Contractors and states the following:
“Misclassification of employees as independent contractors is found in an increasing number of workplaces in the United States […] 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. […] Many states have acknowledged this problematic trend and have responded with legislation and misclassification task forces. […] WHD has entered into memoranda of understanding with many of these states, as well as the Internal Revenue Service.”
The Administrator’s interpretation starts with examining the Act’s definitions relative to employment. The FLSA defines “employee” as any individual employed by an employer, and then defines “employer” to include any person acting directly or indirectly in the interest of an employer in relation to an employee. Most important, according to the Administrator’s interpretation, is the definition of “employ” which includes “to suffer or permit to work.” The Administrator points out the “to suffer or permit to work” standard was specifically designed to ensure as broad of a scope of statutory coverage under the Act as possible.
Therefore, according to the Administrator, the FLSA definitions applicable to employment and employees should be applied very broadly to extend coverage under the Act to those individuals who may not fall within a typical “common law” employer-employee relationship. This also results in assigning responsibility under the FLSA to businesses that do not directly supervise said individuals. This is not a new concept. In May 2014, Federal House Bill 4611 & Senate House Bill 1687 titled the Payroll Fraud Prevention Act of 2013 attempted to extend coverage under the Act as well, but the both Bills died.
The Economic Realities Factors Guide the Determination Whether the Worker Is Truly an Independent Business or Is Economically Dependent on the Employer
The remainder of the interpretation provides an analysis of the “economic realities” test and the factors that apply when determining the classification of a worker to be Independent Contractor or Employee:
- The extent to which the work performed is an integral part of the employer’s business;
- The worker’s opportunity for profit or loss depending on his or her managerial skills;
- The extent of the relative investments of the employer and worker;
- Whether the work performed requires special skills and initiative;
- The permanency of the relationship; and
- The degree of control exercised or retained by the employer.
The interpretation clearly states the following regarding the application of facts to the “economic realities” test:
“In undertaking this analysis, each factor is examined and analyzed in relation to one another, and no single factor is determinative. The ‘control’ factor, for example, should not be given undue weight. The factors should be considered in totality to determine whether a worker is economically dependent on the employer, and thus an employee. The factors should not be applied as a checklist, but rather the outcome must be determined by a qualitative rather than a quantitative analysis.”
Is the Work an Integral Part of the Employer’s Business?
The term “integral” is equivalent to economic dependency when analyzing the first factor of the test, according to the Administrator’s interpretation. In the interpretation the following analysis of “integral” is made:
“If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer. […] Workers are more likely to be ‘employees’ under the FLSA if they perform the primary work of the alleged employer. […] Work can be integral to a business even if the work is just one component of the business and/or is performed by hundreds or thousands of other workers.”
Though this factor of the “economic realities” appears to be an insurmountable, especially in industries such as transportation, it is important for companies to remember the Administrator’s statement that no single factor should carry undue weight over the others. The totality of the circumstances should be considered in a proper analysis of a workers status as an Independent Contractor or employee.
Therefore, proper steps should be taken by a company to ensure they are structured (at a corporate level and operationally) to illustrate separation and lack of economic dependency.
Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
The interpretation of this factor focuses on whether and individual is required to leverage their managerial skills in order to profit or loss when providing services. The following statements are made with regard to the analysis of this factor:
“In considering whether a worker has an opportunity for profit or loss, the focus is whether the worker’s managerial skill can affect his or her profit and loss. […] The worker’s managerial skill will often affect opportunity for profit or loss beyond the current job, such as by leading to additional business from other parties or by reducing the opportunity for future work. For example, a worker’s decisions to hire others, purchase materials and equipment, advertise, rent space, and manage time tables may reflect managerial skills that will affect his or her opportunity for profit or loss beyond a current job. […] On the other hand, the worker’s ability to work more hours and the amount of work available from the employer have nothing to do with the worker’s managerial skill and do little to separate employees from independent contractors—both of whom are likely to earn more if they work more and if there is more work available.”
It is clear, based on the interpretation, this factor leans heavily on the worker’s ability to make business decisions that will impact the worker’s profit or loss. Simply deciding to work more in order to make more money does not create a clear delineation between an Independent Contractor and employee. The worker, in order to tip this factor in favor of being an Independent Contractor, must make real business decisions that can impact the worker’s ability to earn a profit.
How Does the Worker’s Relative Investment Compare to the Employer’s Investment?
The Administrator takes a firm stance on how to analyze the Relative Investment factor of the test. In the interpretation, the following statements are made as part of the analysis:
“Even if the worker has made an investment, it should not be considered in isolation; it is the relative investments that matter. […] Looking not just to the nature of the investment, but also comparing the worker’s investment to the employer’s investment helps determine whether the worker is an independent business. […] If so, the worker’s investment should not be relatively minor compared with that of the employer. […] Even if the investment is possibly a business investment, the worker’s investment must be significant in nature and magnitude relative to the employer’s investment in its overall business to indicate that the worker is an independent businessperson.”
The interpretation also offers an example of an analysis that supports Independent Contractor classification. In this example the Administrator focuses on many facts that support an independently established business (i.e. advertising, equipment, hiring habits, working for multiple customers, etc.). Therefore, it is important for individuals to be running their own business, in fact, to be considered an Independent Contractor for this factor under the test.
Does the Work Performed Require Special Skill and Initiative?
The Administrator focuses on the ability of an individual to be independently established when analyzing this factor of the test. The following statements are made as part of the analysis:
“A worker’s business skills, judgment, and initiative, not his or her technical skills, will aid in determining whether the worker is economically independent. […] Even specialized skills do not indicate that workers are in business for themselves, especially if those skills are technical and used to perform the work. […] For skills to be indicative of independent contractor status, they should be used in some independent way, such as demonstrating business-like initiative. […] Efficiency in performing work is not initiative indicative of independent contractor status.”
In order for a worker to be considered an Independent Contractor for this factor of the test, the worker must exhibit skills that illustrate “business-like” characteristics rather than just the ability to perform the work, even if it is specialized. Again, the analysis made in the interpretation leans heavily in favor of an individual being independently established as a true business.
Is the Relationship between the Worker and the Employer Permanent or Indefinite?
The Administrator’s interpretation of this factor of the test closely mirrors the others. Permanency of a relationship, or lack thereof, are not necessary the focus of this factor of the test. Though these facts play a role in the analysis, the weight of the focus is on whether the permanency in the relationship is the choice of the worker or company. For example:
“Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee. […] Workers who “worked until they quit or were terminated” had relationship “similar to an at-will employment arrangement. […] However, a lack of permanence or indefiniteness does not automatically suggest an independent contractor relationship, and the reason for the lack of permanence or indefiniteness should be carefully reviewed to determine if the reason is indicative of the worker’s running an independent business. […] A worker’s lack of a permanent or indefinite relationship with an employer is indicative of independent contractor status if it results from the worker’s own independent business initiative.”
It is important to pay close attention to an individual’s ability to truly operate their own business when determining their status to be that of employee or Independent Contractor. The interpretation places heavy focus on whether the individual is dependent on the company to determine their permanency. Again, the Administrator emphases individuals need to be independently established businesses.
What is the Nature and Degree of the Employer’s Control?
It is typical for the “control” factor to take a front seat to all of the other facts in an analysis of Independent Contractor or employee. However, the Administrator makes it clear, again, in this portion of the interpretation that “the “control” factor should not play an oversized role in the analysis of whether a worker is an employee or an independent contractor”. The following statements are made regarding the analysis of control:
“As with the other economic realities factors, the employer’s control should be analyzed in light of the ultimate determination whether the worker is economically dependent on the employer or truly an independent businessperson. […] Control is only significant when it shows an individual exerts such a control over a meaningful part of the business that she stands as a separate economic entity. […] And the worker’s control over meaningful aspects of the work must be more than theoretical—the worker must actually exercise it. […] Moreover, workers’ control over the hours when they work is not indicative of independent contractor status. […] Technological advances and enhanced monitoring mechanisms may encourage companies to engage workers not as employees yet maintain stringent control over aspects of the workers’ jobs, from their schedules, to the way that they dress, to the tasks that they carry out. Some employers assert that the control that they exercise over workers is due to the nature of their business, regulatory requirements, or the desire to ensure that their customers are satisfied. However, control exercised over a worker, even for any or all of those reasons, still indicates that the worker is an employee.”
Though the analysis of this factor appears to make it very difficult to maintain Independent Contractor status, it is important to focus on the independently established tone. The Administrator continues to emphasize a worker needs to be economically dependent on him/herself and his/her business decisions rather than on an employer.
The interpretation published by the Administrator contains guidelines that can be used by his field auditors in their analysis of whether an individual(s) is an Independent Contractor or an employee. They are not the law! These are simply an interpretation based on citations from certain cases. However, if a company uses the services of Independent Contractors, careful consideration of this interpretation should be contemplated as part of the going-forward strategy.
A company must pay close attention to an individual’s ability to be independently established separate and apart from the company. The main focus of the economic realities test is to determine how dependent the parties are on one another. This determination cannot be made with any undue weight on an individual factor. Rather, the determination must be made by looking at all of the facts in a matter to determine if they lean more towards Independent Contractor or employee.
The interpretation should not be viewed as an initiative to destroy a long-standing business model. It should be seen as a guide to understand the proper analysis of facts surrounding a company’s current Independent Contractor model. The Interpretation offers great insight on the agency’s view of facts surrounding the determination of Independent Contractor versus employee.