The U.S. Department of Labor Wage and Hour Division recently released new guidance for businesses in an attempt to provide clarity and notice to organizations that may have individuals performing services for them who are improperly classified as independent contractors. The unsurprising summary? The DOL believes that the vast majority of such individuals performing services for employers are “employees” under the Fair Labor Standards Act (FLSA), and the DOL will pursue employers who it believes have misclassified “employees” by labeling them as “contractors.”
Per the guidance, the key question to ask when determining whether somebody is an employee under the FLSA is whether the individual is truly in business for himself/herself (a contractor) or if he/she is dependent upon the employer for work (an employee). Merely calling someone a “contractor,” having the individual sign an independent contractor agreement, and/or giving the individual a Form 1099 does not make the individual an independent contractor. In order to actually determine whether someone is an independent contractor or an employee under the FLSA, courts use a multi-factor “economic reality” test. While different courts have applied different permutations of these factors, courts generally ask:
- Are the services being performed an integral part of the employer’s business? If you are operating a restaurant, your cooks and wait staff are going to be employees. The person who comes and fixes the oven a few times a year? That person probably may be properly classified as an independent contractor. DOL warns that those teleworking at home or utilizing a flexible work schedule can still be “integral” to the employer’s business and thus employees.
- Does the individual’s managerial skill affect his/her opportunity for profit or loss? Can the individual lose money by performing services for you? If so, there is a good chance they are a contractor. Here courts will consider whether the individual can make decisions that impact how much profit or loss he/she realizes.
- How does the individual’s relative investment compare to the employer’s investment? If the individual has not made any type of investment in the work (such as providing his/her own tools or workspace), then the individual is likely an employee. But just because individuals provide their own tools does not automatically make them an independent contractor.
- Do the services performed require special skill or initiative? Does the individual demonstrate managerial and business skills indicative of an independent contractor? Does the individual market his/her own services, determine when to order materials, and determine when to fulfill orders or requests? If yes, the individual more likely could be properly classified as an independent contractor.
- Is the relationship between the individual and the employer permanent or indefinite? Is the individual performing services on one small project or does the individual perform services continuously and repeatedly for the same employer? Does the relationship continue indefinitely until one party decides to end it? If yes, the individual is likely an employee. Part-time workers and temporary workers are still employees if hiring such individuals is an operational characteristic intrinsic to a particular industry.
- What is the nature and degree of the employer’s control? Does the employer control the hours of work, manner of dress or how the individual performs a particular job or service?
In considering these questions, each factor is analyzed in relation to one another and no single factor is determinative. The factors should not be looked at as a “checklist” and are to be considered in their totality.
Properly classified independent contractors are typically not entitled to minimum wage, overtime, benefits, unemployment compensation, or workers’ compensation. We expect that the Plaintiff’s Bar will attempt to use the DOL memo as a basis to file more lawsuits on behalf of individuals allegedly improperly classified as “contractors” in an effort to recover unpaid wages and benefits. Keep in mind that the DOL believes that almost all those performing services for a business are employees rather than contractors, so in the event that the DOL comes knocking, you already know how they will view the relationship.
What can you do to ensure your independent contractors are truly “contractors” in the eyes of the law? We recommend that you audit your practices by considering the relationship you have with all contractors and reviewing the duties of those classified as such. Attorneys in the McNees Labor & Employment Group regularly conduct audits to make sure that such individuals are properly classified and that employers are complying with the requirements of the FLSA and applicable state wage and hour laws.