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Independent contractor or employee: DOL gives guidance

August 26, 2015
Hall Hall

This summer was a hot one for reasons other than the weather. The legal world saw many heated changes this summer, including the same-sex marriage decision in Obergefell v. Hodges and the EEOC’s ruling that discrimination against an individual because of that person’s sexual orientation is discrimination because of sex. Although the recent developments in the wage and hour world are not as eye-catching as the ones above, employees and employers should be aware of the Department of Labor’s interpretation about independent contractor status and the proposed changes to the salary basis test under the Fair Labor Standards Act. The independent contractor interpretation and the proposed rule change to the salary basis test will have long-lasting implications for the business community.

DOL interpretation of independent contractor status

In mid-July, the administrator for the DOL’s wage and hour division issued an interpretation to give guidance about whether a worker is an independent contractor or an employee. The interpretation does not have the force of law, but it reflects how the DOL is viewing this issue when it investigates companies accused of misclassifying employees and identifies appropriate cases for litigation. As employers may know, DOL investigations can occur at any time, with or without notice. A DOL investigator can appear at the employer’s premises unannounced to inspect records and interview employees as part of the investigation. If the DOL investigator finds that independent contractors are misclassified, the employer could be liable for minimum wages, overtime compensation, worker’s compensation, unemployment insurance, health insurance coverage and employment withholding taxes. In addition, these “new” employees may be able to assert and seek statutory protections under state and federal civil rights and anti-discrimination laws prohibiting harassment, discrimination and retaliation.

The DOL believes that most workers are employees under the FLSA. The key question for the DOL is whether a worker is economically dependent on an employer (and thus is an employee) or if the worker is really operating his or her own business (and thus an independent contractor). This is analyzed using a six-factor economic realities test that considers the totality of the circumstances to make a determination. No single factor is determinative. The factors include:

(A) the extent to which the work performed is an integral part of the employer’s business (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 and an employee);

(B) the worker’s opportunity for profit or loss depending on his or her managerial skill (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. A worker in business for him or herself faces the possibility to not only make a profit, but also to experience a loss);

(C) the extent of the relative investments of the employer and the worker (the worker should make some investment and undertake at least some risk for a loss in order for there to be an indication that he or she is an independent business. An independent contractor typically makes investments that support a business as a business beyond any particular job);

(D) whether the work performed requires special skills and initiative (a worker’s business skills, judgment, and initiative, not his or her technical skills, will aid in determining whether the worker is economically independent);

(E) the permanency of the relationship (permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee); and

(F) the degree of control exercised or retained by the employer (the worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business).

These factors should not be applied as a checklist, but rather the outcome must be determined by a qualitative rather than a quantitative analysis. The application of the economic realities factors is guided by the DOL’s belief that the FLSA should be liberally construed to provide broad coverage for workers. Moreover, the economic realities of the relationship, and not the label an employer gives it, are determinative. 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.

Based on this new interpretation, it is worthwhile for all employers to review their relationships with independent contractors.

Proposed rule change: FLSA salary basis test

At the end of June, the DOL issued proposed regulations which, if adopted, could dramatically increase the number of workers eligible to earn overtime compensation under the FLSA. The FLSA includes “white collar” exemptions from overtime compensation for certain executive, administrative and professional workers if they meet certain pay and duties tests. Currently, the white collar exemptions in 29 CFR Part 541 require that employers pay employees a salary of at least $455 per week ($23,660 annually) in order to be exempt from overtime compensation.

The proposed regulations more than double the salary-basis requirement for the white-collar exemptions. The proposed regulations did not amend the duties portion of the tests, but they did increase the salary basis test to $970 per week ($50,440 annually). The DOL has also proposed automatic updates to the salary-basis threshold going forward, meaning employers may have to continuously modify their payrolls to ensure their employees are properly classified as exempt. Although these are only proposed regulations now, it would be prudent for employers to review their workforce to determine who is classified as an exempt employee and the factors supporting why they are classified as an exempt employee.•
 

• Carolyn Clay Hall is a partner in the labor and employment department at Bingham Greenebaum Doll LLP. She represents employers of all sizes and provides advice and litigation representation on matters including restrictive covenants, policies, training, wage and hour, FMLA, discrimination, harassment and retaliation claims.

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