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Worker Win: DOL Adopts Broader Definition of “Employee” for Misclassification Cases

DOL's David Weil has passionately pursued proper employee protections regarding misclassification

DOL’s David Weil has passionately pursued proper employee protections regarding misclassification

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The Department of Labor’s Wage and Hour Division has issued a new 15-page guidance aimed at employers who try to get away with misclassifying employees as independent contractors.  Under the guidance, most workers would be classified as employees under the Fair Labor Standards Act (FLSA). 

David Weil, head of the DOL’s Wage and Hour Division, said in his “administrator’s interpretation” that the department will now place more emphasis on a worker’s economic relationship with a company, rather than the worker’s ability to control his or her own schedule.

Mike Billok, a management side labor and employment attorney, told The Business Journals:

“As you can imagine, most workers do receive pay and thus have some dependence on the source of the income.  So unless a worker has multiple sources of income to demonstrate that he or she is truly in business for himself or herself, many people that currently consider themselves to be independent contractors are now employees in the DOL’s eyes.”

While the new guidance does not change the “economic realities” test that most courts use to determine the relationship between company and worker, it does state that each factor of the economic realities test must be applied consistently with the broad definition of “employ” found in the FLSA.  According to Ford & Harrison, LLP, the economic realities test usually considers the following factors:

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.

The new interpretation does not change any of these factors, but does provide some important takeaways for each factor.  Ford & Harrison’s Rachel Ziolkowski Ullrich breaks down these takeaways:

• The DOL specifically noted that work performed away from the employer’s premises, whether in the worker’s home or at the employer’s customer, can still be integral to the employer’s business.

• If a worker is truly in business for him or herself, and, therefore, an independent contractor, the worker should be at some risk of loss due to the managerial decisions he or she makes. Merely being able to work more hours is not a managerial skill that affects the worker’s opportunity for profit or loss.

• In evaluating the relative investments of the employer and worker, courts should consider whether the worker has made investments in his or her business to further its ability to expand, reduce its cost structure or extend its business plan. Courts should also consider how that investment compares to the employer’s investment, not just to the work performed by the worker but to the employer’s overall investment in the project.

• Merely having specialized skills does not mean that the worker is an independent contractor. There is a difference between providing skilled labor and demonstrating the skill and initiative of an independent contractor.  The Interpretation states, in probably its most telling sentence: “Only carpenters, construction workers, electricians, and other workers who operate as independent businesses, as opposed to being economically dependent on their employer, are independent contractors.”

• Courts should also consider whether the lack of permanence or indefiniteness in the worker’s relationship with the employer is the result of operational characteristics of the business (i.e., whether the work is typically transient or seasonal) or the result of the worker’s own independent business initiative.  

• Control exerted due to the nature of the business, regulatory requirements and/or customer satisfaction are indicative of an employee/employer relationship. The issue is how much control is exercised by the employer, not why the employer is exerting it.

Read the entire 15-page guidance.


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