Employees or Independent Contractors
The U.S. Department of Labor has issued a blog post with new guidance on classifying workers as employees or independent contractors under the federal Fair Labor Standards Act (FSLA), an issue that has attracted renewed attention in the on-demand economy.
Misclassification of employees as independent contractors is increasing, “in part reflecting larger restructuring of business organizations,” wrote David Weil, the administrator of the DOL’s Wage and Hour Division, in his blog post entitled, “The Application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who Are Misclassified as Independent Contractors.”
He said that misclassification, in addition to denying workers statutory protections, 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,” he wrote.
The 15-page DOL memo reviews the six-part “economic realities” test of the relationship between a worker and employee that should be used when classifying. This multi-factor test focuses on whether the worker is economically dependent on the employer and thus an employee, or in business for him or herself and thus an independent contractor.
The issue of classifying workers has taken on new importance in an economy where companies like Uber, Lyft and FedEx have built business models that classify their drivers as independent contractors, but some of those drivers contend they are employees.
Those classified as employees are entitled to the protections provided by FSLA including minimum wage, overtime compensation, unemployment insurance and workers’ compensation. Independent contractors are not covered by the FSLA. According to the DOL, Congress intended that the FSLA be interpreted broadly to classify workers as employees and courts have generally followed a liberal interpretation favoring the employee classification.
According to Weil, the economic realities of the relationship, and not the label an employer gives it, are determinative. While most misclassified employees are labeled “independent contractors,” DOL said it has seen an increasing number of instances where employees are labeled “owners,” “partners,” or “members of a limited liability company.” In these cases, the economic realities analysis must still be applied to determine whether the workers are employees, according to DOL.
While the DOL is trying to answer questions surrounding workers in the new gig economy, states are sending mixed messages on the issue.
The California Labor Commission in June 2015 ruled that a San Francisco-based driver for the ride-hailing service Uber is an employee, not a contractor. Uber is “involved in every aspect of the operation,” said the commissioner in that case. Uber disputes that characterization and defends its business model, claiming its drivers are independent contractors, not employees, and that it is “nothing more than a neutral technology platform.”
When determining whether a worker is an employee or independent contractor, all of the factors of the “economics realities” test must be considered in each case, and no one factor is determinative of whether a worker is an employee. However, the factors themselves “should not be applied in a mechanical fashion, but with an understanding that the factors are indicators of the broader concept of economic dependence,” according to Weil.
The six factors or questions in the “economic realities” test include:
1. Is the Work an Integral Part of the Employer’s Business?
2. Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
3. How Does the Worker’s Relative Investment Compare to the Employer’s Investment
4. Does the Work Performed Require Special Skill and Initiative?
5. Is the Relationship between the Worker and the Employer Permanent or Indefinite?
6. What is the Nature and Degree of the Employer’s Control?
This has been a summarized brief of the issue is your worker an employee or an independent contractor. For a more detailed discussion including examples of the “six factors” see the Insurance Journal article: