Department of Labor Issues Aggressive Interpretation of Independent Contractor Classification
The DOL’s new interpretation of the FLSA test for classification purports to eliminate independent contractor status for most workers and broadly expand the FLSA’s coverage.
On July 15, David Weil, the Administrator for the US Department of Labor’s (DOL’s) Wage and Hour Division, issued an Administrator’s Interpretation concerning the Fair Labor Standards Act (FLSA) and specifically addressing the test to determine if an individual is an employee or an independent contractor. The new interpretation—which the DOL declined to submit for comment by the public (as it does with most proposed regulations)—concludes that “most workers are employees under the FLSA’s broad definitions.”
Purportedly spurred by the receipt of “numerous complaints from workers alleging misclassification” and the history of “successful enforcement actions against employers who misclassify workers,” the interpretation ignores decades of legal precedent concerning the classification of employees and independent contractors in a way that will now challenge many legitimate independent contractor relationships.
Alleged Justification for the New Interpretation
As evidenced by the title of the interpretation, “The Application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who Are Misclassified as Independent Contractors,” the DOL’s new position flows out of the helplessly broad and unclear definition of the word “employ” as meaning “to suffer or permit to work.” Citing decisions issued decades ago in a very different, manual labor–dominated economy, the interpretation states that those few words were intended to extend the FLSA’s coverage to the broadest extent possible. With that as its premise, the DOL goes on in its interpretation to explain that the “economic realities test” that it and several courts created should similarly be interpreted and applied in a way that extends the FLSA’s coverage to “most workers.” This standard, according to the DOL, “was specifically designed to ensure as broad of a scope of statutory coverage as possible.”
For the last half century, however, courts applying a multifactored “economic realities” test have held that numerous workers were independent contractors, and not employees, under the FLSA. This reality, and the rationale for those decisions, finds no place in the current interpretation. Instead, the interpretation does not include any case law that favors putative employers.
Intending that the economic realities test now be applied in only one direction—to classify most workers as employees—the interpretation then goes through each of the factors of that test and explains how the DOL believes that they should be applied. In doing so, it relegates to “insignificance” concepts and factors that for decades have helped define independence, such as whether a worker controls his or her own hours, has little or no supervision, and decides what tools and equipment to buy. This interpretation will result in numerous challenges, including as to whether this one-sided survey should be given any deference.
The New Economic Realities Factors
Although it has not created any additional factors as part of the economic realities test, the DOL seeks to legislate the weight to afford to each factor, giving significant (and almost dispositive) weight to some factors while incorrectly giving little or no weight to others. The result pushes the envelope on each of the six factors of the economic realities test, interpreting them in a way that steers the factors in favor of employee status. The DOL does so despite inconsistently agreeing with the traditional notion, found by many courts, that “no single factor is determinative” and each factor “should be considered in totality” to determine whether a worker is an employee or an independent contractor.
Whether Work Is an Integral Part of a Putative Employer’s Business
The interpretation seeks to give added (if not dispositive) weight to whether a worker performs functions integral to an employer’s business, an approach similar to the “ABC” test used in some states, with one factor being whether a worker performs the same work that a company is in business to provide. The Administrator’s Interpretation describes this factor as “compelling” and explains that “integral work” may include that which “is just one component of the business and/or is performed by hundreds or thousands of other workers” whose work may be “the same as and interchangeable with many others’ work.” Undercutting the importance of where the work is done, the DOL further opines that such work may be integral “even if it is performed away from the employer’s premises, at the worker’s home, or on the premises of the employer’s customers.” Thus, not only has the DOL broadly defined integral work, it also has given this factor significant weight in determining whether a worker is an employee under the FLSA. This is inconsistent with many years of careful judicial consideration of this factor.
Whether a Worker’s “Managerial” Skill Affects the Opportunity for Profit or Loss
The DOL likewise takes a pro-employee view of the traditional factor that evaluates a worker’s ability to impact the opportunity for profit or risk of loss. Instead of broadly focusing on all of the methods through which an individual can impact his or her profit or loss or the profit or loss of his or her business, and rejecting the application of this factor by many circuit courts as “the opportunity for profit or loss depending upon the workers skill,” the DOL seeks to limit this inquiry to the “managerial” tools that can be applied to impact profit or loss. This ignores that some individuals are purposefully in business for themselves to avoid having any management. Now, according to the DOL, a “worker’s ability to work more hours” and the worker’s substantive “skills” have no bearing on the analysis, because it does not relate to “the worker’s managerial skill.” Moreover, the DOL concludes that the profit or loss experienced by an independent contractor generally must extend “beyond the current job” to “additional business from other parties” or other future work. This overlooks that truly independent workers may choose to provide their services to one company before providing services elsewhere, and that doing so does not negate their efforts to generate a profit. With this interpretation, the DOL effectively asks individuals to prove that they are simultaneously performing work for additional individuals or entities, even if they don’t want to, and even though the DOL inconsistently notes that working for multiple companies does not necessarily make someone an independent contractor.
Comparing the Relative Investment of a Worker and Putative Employer
With no recognition of the current economy and its new business models, the DOL opines that the traditional analysis of the level of a worker's investment in equipment or materials for the task now should be a comparison of the worker’s relative investment compared to that of the putative employer. According to the DOL, “the worker’s investment must be significant in nature and magnitude relative to the employer’s investment in its overall business to indicate that the worker is an independent businessperson.” According to the DOL, the worker’s investment, no matter how large, must be compared to the employer’s overall investment, not just that which is dedicated to “the particular job performed by the worker.” This flawed analysis ignores decades of precedent and the reality that in almost every instance, a company will have invested substantially more in its business than its independent contractors have in theirs. The DOL also ignores scores of cases that focus on the investment made by individuals in their tools and equipment. Now, according to the DOL, “investing in tools and equipment is not necessarily a business investment or a capital expenditure," and instead may simply be necessary to perform the specific work.
Whether Work Performed Requires Special Skill and Initiative
The DOL’s analysis of whether the work performed requires skill and initiative also is slanted against putative employers. According to the Administrator’s Interpretation, “[e]ven specialized skills do not indicate that workers are in business for themselves.” Rather, workers with specialized technical skills may be considered independent contractors only if those workers exercise “business skills, judgment, or initiative” in “operat[ing] . . . independent businesses, as opposed to being economically dependent on their employer.” This new interpretation again flies in the face of decades of more measured analysis. Specifically, numerous courts have looked simply at the degree of skill required for the rendering of the services. The DOL would now require the word “business” to be in front of every word, without any support in the statute or regulations, so that only “business” skills, “business” judgment, and “business” initiative qualify as independent actions. Nothing in the FLSA or in decades of precedent so marginalizes the substantive abilities of highly skilled independent contractors.
Whether a Working Relationship Is Permanent or Indefinite
The Administrator’s Interpretation does not provide any meaningful guidance on the impact of a permanent or indefinite relationship. Instead, in what seems to be internally inconsistent positions, the DOL concludes that “permanence or indefiniteness” in a relationship “suggests that the worker is an employee,” but “a lack of permanence or indefiniteness does not automatically suggest an independent contractor relationship.” According to the DOL “[a] worker’s lack of a permanent or indefinite relationship with an employer is indicative of independent contractor status [only] if it results from the worker’s owner independent business initiative.” In short, it seems that the worker must have some say in when a relationship ends.
The Nature and Degree of a Putative Employer’s Control
Finally, the DOL seeks to give the question of control by an employer minimal weight, which contradicts the cases, courts, and statutes that designate “level of control” or “right to control” as the most important factor. To get to their position, the DOL states that, at the time the FLSA was enacted, “Congress rejected the common law control test in drafting the FLSA.” However, Congress did not include any test in the FLSA, and only the DOL and some courts created the economic realities test. From this non-existent base, the Administrator’s Interpretation then states that neither working offsite (or at home) nor controlling one’s own hours, nor having little supervision, is “indicative of independent contractor status.” But it makes little sense to ignore the absence of control over a worker who works in a separate location from a putative employer’s place of employment and with little supervision—a scenario that is in stark contrast to most employment relationships. Moreover, even if the facts of a particular case demonstrate that the putative employer lacked control over its contractors, the DOL insists that this factor “should not play an oversized role in the [independent contractor] analysis” or “be given undue weight.” This again turns decades of contrary precedent on its head.
Absent from this interpretation is any evidentiary support from the broad survey that the DOL reported it was conducting last year of independent contractors and companies that use them. If the results of that survey supported the DOL’s new take on the contractor/employee test, one would have expected to see that information front and center in this interpretation.
It is unclear if and how courts will accept the DOL’s new guidance, but there is little question that the Administrator’s Interpretation will provide new motivation for workers and the DOL to test the classification of independent contractors. If it is actually accepted by courts, the Administrator’s Interpretation presents significant new risks to companies that use independent contractors, particularly those who can be argued to be integral to a company’s business. The DOL and plaintiffs’ lawyers will likely contend that even workers with specialized skills may not be classified as independent contractors unless those skills relate directly to business judgment or business initiative in the operation of their own businesses—not just skills specific to a client company’s business needs. At a minimum, the interpretation will give the plaintiffs’ bar dozens of sound bites that will now be littered throughout their briefs seeking to defeat independent contractor status. And DOL investigators will now be guided by this flawed take on the FLSA.
All businesses would be wise to carefully review their independent contractor relationships in light of this new guidance and to evaluate measures available to reduce misclassification risk, including potential arbitration agreements in contracts with class/collective action waivers and even changes to the contractor relationship. Companies should also be prepared to challenge on an individual and industry-wide basis, the deference, if any, to afford to this interpretation.