Posted: July 24, 2015

by S. Kato Crews 

On July 15, 2015, the U.S. Department of Labor (DOL) issued Administrator’s Interpretation No. 2015-1, which provides guidance on the application of the Fair Labor Standards Act’s (FLSA) “suffer or permit to work” standard in the identification of employees who may be misclassified as independent contractors. Misclassification of employees as independent contractors can result in pricey monetary penalties under both state and federal laws. As the DOL Interpretative Memo points out:

"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."

In an effort to assist employers and reduce instances of misclassification, the Interpretive Memo explains that the "economic realities" test is the appropriate test to apply when analyzing worker relationships for possible misclassification. The test focuses on whether the worker is truly an independent business or is economically dependent on the employer. Its factors typically include: (1) the extent to which the work performed is an integral part of the employer’s business; (2) the worker’s opportunity for profit or loss depending on his or her managerial skill; (3) the extent of the relative investments of the employer and the worker; (4) whether the work performed requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer.

According to the DOL, "most workers are employees under the FLSA’s broad definitions." Courts tend to defer to a government agency's interpretation of the laws enforced by that agency. As a result, employers would be wise to audit and scrutinize their independent contractor classifications closely, recognizing that the DOL may have just significantly narrowed the field of what will be considered true independent contractor relationships.