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DOL Puts Businesses on Notice Regarding Independent Contractors In 2011, the Administration began an initiative to rein in the use of independent contractors and transform those workers into W-2 employees covered by Social Security, Medicare, the Family and Medical Leave Act (FMLA), and the Affordable Care Act (Obamacare). On July 16, 2015, the latest salvo in this effort was released when David Weil, the Administrator of the Department of Labor’s (DOL) Wage and Hour Division (WHD)1, issued Administrator’s Interpretation No. 2015-1 (AI), which purports to give additional guidance regarding the application of the standards for who is an “employee” under the Fair Labor Standards Act of 1938 (FLSA). Background Traditionally, a “control test” was used to determine whether or not a worker was an “employee.” This common-law-of-agency test looked at whether the employer had the right to tell the worker what to do and how, when, and where to do the job. However, § 203(g) of the FLSA states that “‘Employ’ includes to suffer or permit to work.” The phrase “suffer or permit” was originally used to extend liability under child labor laws beyond those who employed or controlled the child laborer to those that “suffered or permitted” the work. Yet, in more recent rulings, courts have begun to cite this definition of “employ” as a way to broaden the definitions of “employer” and “employee” beyond anything recognized under the common-law-control test. Courts have instead developed an “economic-realities” test to determine whether or not a worker is an employee or an independent contractor under the FLSA. The economic realities test expands upon the control test and attempts to determine the true nature of the relationship between the worker and employer by examining the totality of the circumstances (or the relationship). Factors considered under the economic-realities test typically include:

• The degree to which control is exercised or retained by the employer; • The worker’s opportunities for profit or loss; • The relative investments of the employer and worker; • The permanency and length of the relationship between the business and the

individual; • The degree of skill needed to do the person’s work; and • The degree to which the work performed by the individual is an integral part of

the employer’s business.

1 Mr. Weil is also the author of “The Fissured Workplace”, a work that the Small Business Council of America refers to as “a book on the evils of corporate outsourcing”.

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However, even under the economic-realities test, a finding of an employer-employee relationship is most often based on, or heavily weighted toward, issues related to control. If the business or person doing the hiring controls or has the right to control the individual’s work performance, there is an typically an employment relationship. If not, the worker is usually an independent contractor. This situation is apparently unacceptable to the DOL. Administrator’s Interpretation No. 2015-1 The AI appears to turn the economic-realities test on its ear by finding not only that the control factor “should not be given undue weight” but also, using the most restrictive case law available, that the factors of the economic-realities test must be analyzed to determine “whether the worker is economically dependent on the employer or truly in business for himself”2. The AI states that “application of the economic realities factors is guided by the overarching principle that the FLSA should be liberally construed to provide broad coverage for workers” and then goes through each of the economic realities factors to illustrate how each factor should be “properly used.” The following highlights the Administrator’s narrow (as compared to a traditional economic-realities test analysis) view of how each factor should be applied:

• The degree to which control is exercised or retained by the employer: The worker must control meaningful aspects of the work to view the worker as conducting his or her own business, but a worker’s control over the hours he or she works is not indicative of independent-contractor status. Further, control only exercised for purposes of regulatory compliance, quality control, or customer satisfaction is still control that indicates a worker is an employee.

• The worker’s opportunities for profit or loss: Such opportunities must only be a result of the worker’s managerial skills. Accordingly, the ability to earn more by working more hours or by being more proficient, and conversely the opportunity for loss by being inefficient, is not indicative of independent contractor status.

• The relative investments of the employer and worker: An independent contractor makes investments that support the business beyond a particular job and are not relatively minor compared with that of the employer. Accordingly, investing in tools or equipment does not necessarily indicate that a worker in an independent contractor when compared to the employer’s investment in the business. (The AI gives an example of an equipped truck costing $40,000 that did not indicate its worker-owners were independent contractors.)

2 This reasoning ignores the fact that many small businesses are dependent on a particular client, and therefore does not take into consideration the possibility that someone can be in business for themselves and dependent on a particular client.

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• The permanency and length of the relationship between the business and the individual: Independent contractors, as a result of their independent business initiative, will eschew permanent or indefinite relationships with employers. Accordingly, working continuously or repeatedly for a particular employer indicates an employee relationship.

• The degree of skill needed to do the person’s work: Only a worker’s business skills, judgment, and initiative will aid in determining whether or not the worker is economically independent. Accordingly, technical or highly specialized skills are not indicative of an independent contractor.

• The degree to which the work performed by the individual is an integral part of the employer’s business: Work can be integral to a business even if the work is just one component of the business and/or is performed by hundreds or thousands of other workers. Further, work can be integral to an employer’s business even if it is performed away from the employer’s premises.

Conclusion Obviously, this AI and the interpretations of the economic-realities factors are extremely one-sided; but they do give a clear indication that the Administration is targeting independent-contractor status. The Small Business Council of America has stated: “The new AI which states that most workers qualify as employees under the FLSA could cause significant misclassification problems for businesses, leading to more DOL investigations and enforcement actions and increased private litigation… The 15-page WHD interpretation on the independent-contractor issue makes the Department's animosity to the use of independent contractors very clear… The DOL has emphatically warned employers: [the DOL] is going to turn most independent contractors into employees.” It should be noted that the DOL did not issue the AI guidance through the usual notice and comment rule-making process. Accordingly, it will not lead to changes in regulations and is essentially nonbinding guidance articulating the DOL’s interpretation of the FLSA. However, given the Supreme Court’s 2015 decision in Perez v. Mortgage Bankers Association, which gave the DOL a green light for such non-binding guidance and then relied upon it to rule in the DOL’s favor, it seems clear that this AI was issued with the intent that courts will, at least to some degree, defer to it in classification cases. This will result in fewer workers being classified as independent contractors and more workers being considered employees under FLSA and, by extension, Social Security, Medicare, FMLA, and Obamacare.