New Misclassification Guidance: DOL Considers Most Workers to be “Employees”

On July 15, 2015, David Weil, the Department of Labor’s (“DOL”) Administrator of the Wage and Hour Division, issued an Administrator’s Interpretation Memorandum (“Guidance”) interpreting the Fair Labor Standards Act broadly to include most workers as “employees” as opposed to independent contractors. The Guidance is significant because as many as one third of the American workforce is estimated to be employed in the rapidly growing “sharing” or “gig” economy,[1] and these individuals are frequently classified as independent contractors. The Guidance is the latest  DOL initiative designed to attack misclassification of workers.

Application of Economic Realities Test

Recognizing that courts have employed different tests when examining the classification issue, the Guidance states that the DOL will use the six factors “economic realities” test.[2] These same factors are currently used by the Fourth Circuit when analyzing whether a worker is an employee or independent contractor for purposes of the FLSA.[3] The central question for employers in Virginia (even before the Guidance was issued) is “whether the [workers] were, as a matter of economic reality, dependent on the business they serve, or, conversely, whether they were in business for themselves.”[4]

Here is a quick look at what the new Guidance says:

1. In terms of evaluating how “integral” an employee’s work is to the employer’s business, the Guidance suggests that a true independent contractor’s work is unlikely to be integral to the employer’s business. By way of example, the DOL suggests that a carpenter that works for a construction company and frames residential houses is someone who is integral to that employer’s business. In contrast, a worker who is with a software developer and who is hired to assist the construction company to develop programs to track its work is not integral to the business.
2. In terms of “managerial skill,” the Guidance suggests that the ability to hire others, purchase materials and equipment, advertise, rent space and manage time tables, affects a worker’s opportunity to gain a profit or suffer a loss are the focus. The Guidance distinguishes between managerial skill and one’s ability to set his or her own hours. The difference is vital because a focus on a worker’s ability to “work more hours” has been used in the past to show the worker had a potential opportunity to experience profit or loss. The Guidance argues, however, that the ability to simply “work more hours” in order to increase profit will not be considered a significant factor in establishing the independent contractor status. Rather, a worker who has flexibility as to which jobs to perform, to advertise for customers, recruit support staff and solicit clients is more likely an independent contractor under this factor.
3. As to the “relative investment” factor, the Guidance notes that the independent contractor must make some investment in order for there to be an indication of an independent business. If this occurs, the real inquiry is the relative nature of the investment by the worker. By way of an example, a cleaning services company hires a cleaning worker who signs an independent contractor agreement. The cleaning company provides that worker with insurance, a vehicle to use, and all equipment and supplies. The company also invests in advertising and finding clients. If the only investment put forth by the worker is his occasional investment of his own preferred cleaning supplies, the relative investment by the worker compared to the employer is quite low. As such, this scenario suggests an employee classification. The ultimate question on this factor is whether the worker’s investment indicates a risk of real loss, or is the worker economically dependent upon the employer.
4. In terms of “special skills,” the presence of specialized skills does not automatically weigh in favor of independent contractor classification. For example, the technical skills of cable installers, carpenters, construction workers, and electricians, for example, even assuming they are special, are not determinative. Instead, the DOL’s focus will be on whether those specialized skills allow the worker to operate with economic independence.
5. As to the nature of the relationship (permanent or indefinite), the Guidance notes that an independent contractor is typically found if the status is “temporary,” whereas employee classification is inferred from permanency. The Guidance rejects this traditional theory. DOL asserts that a lack of permanence should be carefully reviewed “to determine if the reason [or its lack] is indicative of the worker’s independent business.” Borrowing from a Second Circuit opinion,[5] the Guidance states that “[t]he key is whether the lack of permanence or indefiniteness is due to ‘operational characteristics intrinsic to the industry’ (for example, employers who hire part-time workers or use staffing agencies).”
6. The final factor analyzed and often emphasized is the nature and degree of the employer’s control. Given technological advances, the DOL notes many employers have been tempted to engage workers not as employees, yet maintain stringent control over the aspects of their jobs such as their schedules and assigning specific tasks to be performed. Despite these advances which might paint a picture that workers are “independent,” the Guidance advises a more careful inquiry to determine the degree to which the worker is economically dependent on the employer.

Conclusion and Takeaways

This Guidance is the latest reminder that the DOL is aggressively pursuing an attack on what it perceives to be broad-based misclassification of workers as independent contractors. DOL’s position is that most workers should be treated as “employees” under the FLSA. The Guidance emphasizes an expansive reading of the FLSA’s definition of “to employ,” as well as its decision to focus on the “economic reality” of the relationship will make DOL investigations much more exacting. For employers in Virginia, West Virginia and North Carolina who use independent contractors, now is the time to review, and possibly revise, their agreements and to evaluate arrangements to ensure compliance. Transitioning workers from an independent contractor arrangement to an employment relationship must be handled carefully. If you have questions, please contact the members of the Gentry Locke Labor & Employment team.

[1] See e.g, Senator Warner Addresses the Opportunities and Challenges of the ‘Sharing Economy’, Official website of Senator Mark R. Warner, available at http://www.warner.senate.gov/public/index.cfm?p=gig-economy .

[2] These factors are often called the “Silk factors” in reference to United States v. Silk, 331 U.S. 704 (1947), the Supreme Court case from which they derive.

[3] In Virginia, employers are also subject to Virginia Department of Labor and Industry (DOLI) regulations. As of July 1, 2015, DOLI implemented a new policy to combat misclassification of workers. DOLI uses a “seven factor” test in determining the classification of workers which differs slightly from the Fourth Circuit and this Guidance.

[4] Schultz v. Capital Int’l Sec., Inc., 466 F.3d 298, 305 (4th Cir. 2006).

[5] Brock v. Superior Care, Inc., 840 F.2d 1054, 160-61 (2d Cir. 1988).