United States: DOL Releases Misclassification Guidance

As we previously posted on this blog, federal and state governments, labor and employment agencies, and plaintiff's attorneys have increased their focus on employers who misclassify employees as "independent contractors" in an effort to save costs on minimum wage and overtime requirements. On July 15, 2015, the federal Department of Labor ("DOL") issued formal guidance addressing misclassification of employees as independent contractors under the Fair Labor Standards Act ("FLSA"). The DOL's guidance stresses the FLSA's already expansive definition of "employee," and makes clear that the DOL will consider most workers to be employees under the statute.

The DOL's guidance focuses on the broad scope of the employment relationship under the FLSA. In determining whether workers are employees or independent contractors under the FLSA, courts have applied the "economic realities" test. The main question for this test is "whether a worker is economically dependent on the employer or in business for him or herself."

The guidance focuses on six economic realities factors that should be used in determining whether a worker is economically dependent or independent. These are: whether the work is an integral part of the employer's business, whether the worker's managerial skill affects his or her opportunity for profit or loss, how the worker's investment compares to the employer's investment, whether the work performed requires special skill and initiative, whether the relationship is permanent or indefinite, and what is the nature and degree of the employer's control. The DOL's guidance, which is available online here, provides specific examples and explanations for each factor.

The guidance further explains that when applying the economic realities test, each factor must be considered, and no one factor is determinative. The DOL notes that a "mechanical application" of the economic realities test is improper; instead, the outcome of the analysis "must be determined by a qualitative rather than quantitative analysis."

The DOL concludes its guidance with the sharp explanation that "In sum, most workers are employees under the FLSA's broad definitions. The very broad definition of employment under the FLSA as [occurring where an entity acts] 'to suffer or permit [a person] to work' and the Act's intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor." Accordingly, the guidance should serve as a strong warning to employers that the DOL will be aggressively targeting employers who misclassify employees as independent contractors. That this guidance comes on the heels of the DOL's recent proposed rule restricting the "White Collar" exemption to overtime requirements indicates that the DOL intends to remain active in, if not intensify, its enforcement of the FLSA.

The DOL is empowered to award back pay and liquidated damages, and to assess civil money penalties of up to $10,000 for instances of minimum wage and overtime violations; a second conviction may result in imprisonment. In addition, the DOL may fine employers who repeatedly violate the requirements up to $1,100 per violation. Courts and plaintiff's attorneys in civil litigations will also likely turn to the DOL's guidance when assessing whether employees are improperly classified. Accordingly, employers should take the DOL's guidance as an opportunity to carefully review their employment policies, and assess whether any employees currently classified as independent contractors will be considered employees by the DOL before the newly proposed regulations become effective, as is expected in 2016.

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