Regulatory update: Identification of misclassified independent contractors

– [Press release from the National Lumber and Building Material Dealers Association (NLBMDA)] –

On July 15, 2015, the Department of Labor’s Wage and Hour Division (WHD) issued an interpretation of how to determine if a worker is an employee or an independent contractor in relationship to the employer.

WHD assumes most workers are employees under the Fair Labor Standards Act (FLSA). Because of ambiguities and vagueness in the statutory definition of this employment relationship, federal courts have fashioned a test for determining the status of a worker under the FLSA. The WHD Interpretation provides an analysis of the courts’ economic realities test and the application of factors that the WHD will be used to determine if a worker is an employee or an independent contractor.

It is important to note that these factors must be considered together and no one factor should be over-emphasized. No one factor is determinative of whether a worker is an employee or independent contractor.

In general, a worker is an employee if he or she is economically dependent on the employer. A worker is an independent contractor if he or she is in business for him or herself. The 6 factors below are intended to help determine the worker status. Just because one factor suggests an employment relationship or an independent contractor relationship does not mean the relationship should be characterized as such. WHD will look at the totality of the circumstances to determine the worker-employer relationship.

Six Factors of the Economic Realities Test

The Interpretation looks at the 6 most common factors applied by federal courts. The bulleted items below are taken from the Interpretation. To be considered an independent contractor:

  1. The worker’s work should not be an integral part of the employer’s business.
    Workers are more likely to be employees rather than independent contractors if they perform the primary job of the employer. Work can be considered integral to a business even if the work is just one component of the business.
  2. The worker should be in business for him or herself with evidence of using managerial skills relative to exposure to profit or loss and development of future work.
    This factor focuses on whether the worker exercises managerial skills and whether those skills affect the worker’s opportunity for both profit and loss. The worker’s ability to work more hours or the amount of work available from the employer has nothing to do with the worker’s managerial skills.
  3. The worker’s relative investment in his or her business should be comparable to that of the employer, demonstrating that the worker is exposed to a risk of loss. Investing in tools and equipment is not necessarily a business investment or a capital expenditure that indicates that the worker is an independent contractor. The comparison of the investments of the worker and employer should not be limited to a particular job; instead, the relative investments of the worker in his or her business should be compared to that of the employer in its business.
  4. The worker’s business skills, judgment, and initiative, not his or her technical skills, will be used to determine if the worker is economically independent – it will be assumed that an independent contractor will use his or her skills in some independent way, such as demonstrating business initiative. Specialized skills do not indicate that workers are in business for themselves, especially if those skills are technical and used to perform the work. For skills to be indicative of independent contractor status, they should be used in some independent way, such as demonstrating business initiative.
  5. Permanence or indefiniteness in the worker-employer relationship suggests that the worker is an employee – it will be assumed an independent contractor will seek independence from a single employer. Even if the working relationship lasts weeks or months instead of years, there can be a permanence or indefiniteness to it as compared to an independent contractor, who typically works one project for an employer and does not necessarily work continuously or repeatedly for an employer. A lack of permanence or indefiniteness does automatically suggest an independent contractor relationship: neither working for other employers nor not relying on the employer as his or her primary source of income transform the worker into the employer’s independent contractor. A worker’s lack of a permanent or indefinite relationship with an employer is indicative of independent contractor status if it results from the worker’s own independent business initiative.
  6. The nature and degree of oversight of the employer will be considered – it will be assumed that an independent contractor will control meaningful aspects of the work performed. The worker’s control over meaningful aspects of the work must be more than theoretical – the worker must actually exercise it. Some employers assert that the control that they exercise over workers is due to the nature of their business, regulatory requirements, or the desire to ensure that their customers are satisfied; however, control exercised over a worker, even for any or all of these reasons, still indicates that the worker is an employee.

    For More Information
    The WHD Interpretation may be found here.
    A PDF of this Regulatory Update may be found here.
    A more complete NLBMDA analysis of the WHD Interpretation may be found here.

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