The Wage Hour Administrator has issued a detailed formal
interpretation of when someone should be classified as an
independent contractor or an employee for purposes of the federal
wage-hour laws (Fair Labor Standards Act). A link to this
interpretation is available here.
The main point of the interpretation, reflecting the
Administration's pro-employee stance, is that the FLSA has a
broader definition of "employ" than the common law test
for determining whether a person is an independent contractor.
According to the Wage Hour Administrator, someone is
"employed" under the FLSA when the business "suffers
or permits" the individual to work. Therefore, the ultimate
inquiry under the FLSA is whether the worker is economically
dependent on the employer or truly is in business for himself or
herself. To make this determination, the focus should be on the
"economic realities" of the relationship, including, but
not limited to, whether the worker is in a position to operate at a
loss as well as at a profit and can manage the business to achieve
that result, whether the individual works exclusively and/or on a
long-term basis for the business, and whether the worker makes a
substantial investment in tools and equipment for the business.
According to the Administrator, when "applying the economic
realities test in view of the expansive definition of
'employ' under the Act, most workers are employees under
the FLSA," and therefore enjoy the protections of the
Act.
This "interpretation" is not a binding regulation. The
courts make the final decision. However, it will be used by federal
Wage and Hour field auditors and other DOL staff as guidance in an
audit to determine who is an "employee" and whether those
workers classified by the company as independent contractors have
been deprived of any rights under the FLSA. Further, it is
reasonable to expect that this guidance will be used by
plaintiff-side class action lawyers as further ammunition to bring
independent contractor misclassification lawsuits. It is advisable
to review your current independent contractor relationships in
light of the factors and considerations cited in this
memorandum.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.