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“Most Workers Are Employees” Asserts Department of Labor

Published on Jul 16, 2015

Magnifying-Glass-AgreementBy Marcia Richards Suelzer, MA, JD In an important Administrator’s Interpretation issued on July 15, 2015, the Department of Labor fired another volley in the ongoing battle to prevent misclassification of employees as independent contractors in order to reduce tax, benefit and employment costs. Emphasizing strongly that the Fair Labor Standards Act (FLSA) was designed to provide a “broad definition of employment” and provide “expansive coverage,” the Administrator concluded: “most workers are employees under the FLSA’s broad definitions. “ Most employers know that in recent years the Department of Labor (DOL), the Internal Revenue Service (IRS) and state labor and tax agencies have been aggressively trying to stop the classification of “employees” as “independent contractors” using a variety of carrot (relief from reclassification penalties) and stick (stepping up worker classification audits).  In these reclassification efforts, the DOL, IRS and courts balance a number of factors (such as control over work and working conditions and skills required by the employee) to determine if—in economic reality—the worker is an employee. For an overview of the traditional tests, see the Business Owner's Toolkit article "Hiring Independent Contractors for Your Workforce Needs." The new guidance does not abolish the current factor or propose new ones. Instead, it imposes a framework, or lens, through which each factor must be evaluated. Indeed, the Interpretation states:

The ultimate inquiry under the FLSA is whether the worker is economically dependent on the employer or truly in business for him or herself. If the worker is economically dependent on the employer, then the worker is an employee. If the worker is in business for him or herself (i.e., economically independent from the employer), then the worker is an independent contractor.

This emphasis on that “economic dependence” on the employer may prove to be a game changer for many businesses—large and small. This will be particularly true for industries that traditionally classify many of their workers as independent contractors. Perhaps signaling increased scrutiny, many of the Interpretation’s most detailed examples involve workers in the construction trades and cleaning services, although brief mention is made of many industries. The issue of misclassification is broader than simply “independent contractor” versus “employee.” Federal and state agencies are on the look-out for any classification used to circumvent tax and labor provisions. Although relegated to a footnote, the Interpretation indicates that DOL is aware  that there are “an increasing number of instances where employees are labeled something else, such as ‘owners,’ ‘partners,’ or ‘members of a limited liability company.’ So whether the worker is called a “partner” or an “independent contractor,” the economic reality of the arrangement will be scrutinized to determine if the individuals actually are employees of the entity. Although some industries well be affected far more than others, the Interpretation clearly signals that the DOL is watching and intends to prevent all employers from characterizing workers as independent contractors (or other non-employees) to reduce costs. Now is a good time to visit with your accountant or attorney to determine if you are classifying your workers correctly based on the economic reality of their relationship to your business.