New DOL labor memo amplifies its position restricting independent contractor status

By Michael J. Burns, courtesy of SBAM Approved Partner ASE

Last week the U.S. Department of Labor (DOL) issued an Administrative Interpretation (AI) advising on the use and misuse of those workers deemed Independent Contractors. An AI is a document that the DOL provides to the public, including employers, interpreting what the Fair Labor Standards Act (FLSA) and its regulations say and mean. This is the first AI put out by the DOL in over a year.

This AI seeks to further restrict the classification of Independent Contractor by more strictly defining it. The AI uses the “economic realities” test to analyze whether a worker’s IC classification is proper. In addition to the FLSA, the test is also used for determining employment status under the Family and Medical Leave Act (FMLA), the Worker Adjustment and Retraining Act (WARN) and many civil rights cases under Title VII of the Civil Rights Act, the Age Discrimination in Employment Act (ADEA) and the Americans with Disabilities Act (ADA). This test is recommended as a fair standardization of definition of employee.

The questions the Wage and Hour Department would use to determine IC status are as follows:

1.The extent to which the work performed is integral to the employer’s business
2.Whether the worker’s managerial skills affect his or her opportunity for profit and loss
3.The relative investments in facilities/equipment by worker and the employer
4.The worker’s skill and initiative
5.The permanency of the worker’s relationship with the employer
6.The nature and degree of control exercised by the employer
These six questions are to determine whether the purported IC has sufficient economic independence and is operating on her own. The DOL will start its investigation from the premise that “most workers are employees under the FLSA’s broad definition.” Just because the worker and the company record the worker as an independent contractor status does not create a legally acceptable classification. The worker must be, and hold himself out as, a “truly independent business.”

Employers should also keep in mind that there currently are other agency and court tests being used to determine independent contractor vs. employee status. There is the IRS’s Common Law test (“20 factor test”), the EEOC’s 16 factor test, state unemployment insurances agencies “ABC” test (most states), not to mention various other agencies both federal and state using one or the other of the above tests and sometimes a combination of them.

Whether the DOL’s more restrictive interpretation of independent contractor will hold up under court scrutiny or not remains to be seen. The DOL Memo references select court decisions to give authority to its AI. The plaintiff’s bar will no doubt use this AI to continue its campaigns for redress against employers. Employers should at the very least review their independent contractor arrangements to assess their exposure to both the DOL’s new enforcement initiatives and the plaintiff’s bar.  The DOL has stepped up its investigation and audit practices and is setting up its new budget to hire over 300 new enforcement operatives.

Coming out just weeks after the DOL put out its new proposed exemption regulations, the memo sends the message that the DOL is truly committed to bringing a large segment of the worker population under its oversight. Further, the Obama administration is fulfilling one of its political commitments to increase labor income, first by expanding the number of those workers eligible for overtime pay, and now by expanding the number of workers who are employees, not ICs.

In a webinar, the law firm Syfarth Shaw advises employers to evaluate their IC models under several relevant factors to ensure their assignment of IC status is correct:

And some specific DO NOTs:

DO NOT provide the IC with employee benefits, tools, equipment, etc.

DO NOT ask the IC to perform services that are already being performed by employees.

DO NOT require the independent contractor to:

DO NOT require the independent contractor to:

DO NOT assume an independent contractor relationship means you are free from managing within any applicable employment laws or company policies.

DO NOT retain a contractor long term – the longer the worker is retained, the greater the risk.

DO NOT use employment terminology with Independent Contractors or treat them like employees. 

DO NOT provide Independent Contractors with a Form W-2. 

Recognize that any reclassification may have impact on a number of other laws, rights and duties, like FMLA and ERISA. And remember that the new AI is not law, but an instruction on how the Wage & Hour Division will review the contractor classification when the situation arises.