DOL's New Interpretive Guidance Shines Spotlight on Independent Contractor Misclassification
On July 15, 2015 the U.S. Department of Labor issued an Administrator's Interpretation highlighting the DOL's position that many workers are misclassified as independent contractors. The Interpretation sets forth the DOL's view of how to determine if a worker is an employee or an independent contractor. In the DOL's view, the vast majority of workers should be treated as employees, and independent contractor status is limited to individuals who are truly in business for themselves.
Background: The DOL's On-Going Focus on the Misclassification of Independent Contractors
The DOL has been increasing its focus on the misclassification of independent contractors for years. In 2011, it launched the Misclassification Initiative, marking its targeted efforts at reducing the misclassification of workers as independent contractors. As part of the Initiative, the DOL and IRS executed a Memorandum of Understanding, which allows the agencies to work together and share information on misclassification issues. Additionally, since 2011, twenty-two states have signed similar MOUs with the DOL to increase coordination between state and federal agencies focused on potential independent contractor misclassifications.
The Administrator's Interpretation
The Interpretation reflects the DOL's view that independent contractor status is very narrow and many employees are misclassified. The DOL applies an "economic realities" test to determine proper classification. The test includes these factors: (1) the extent to which the work performed is an integral part of the employer’s business; (2) the worker's opportunity for profit or loss, depending on his or her managerial skill; (3) the extent of relative investments of the employer and the worker; (4) whether the work requires special skills and initiative; and (5) the degree of control exercised or retained by the employer.
While these factors are not new, the DOL's explanation of them in the Interpretation highlights subtle, but significant, nuances in how the DOL will apply them. For example, the Interpretation states that in considering whether there is an opportunity for profit or loss, the focus is whether the worker's "managerial skill" can affect his or her profit or loss. So, it is not simply the opportunity for profit or loss, but whether the individual's skill in running his or her business can drive the profit or cause the loss. According to the Interpretation, examples of "managerial skill" could include decisions to hire others, purchase materials and equipment, advertise or rent space.
Likewise, rather than focusing simply on the worker's investment in his or her business, the Interpretation compares that investment to the employer's investment in its overall business. Not surprisingly, in most situations, the employer's investment in its business will be greater than the worker's investment in his or her business.
These and other nuances in the Interpretation provide significant insight into how the DOL will approach independent contractor classification, often in ways different and more aggressive than courts. The Interpretation confirms that the Agency continues to view the misclassification of independent contractors as a critical concern and will continue to pursue its enforcement actions aggressively.
What Does This Mean for Employers?
It is not news that employers should take seriously the potential legal ramifications associated with the misclassification of workers as independent contractors. Misclassification can implicate a whole host of federal and state laws, including the Fair Labor Standards Act, Affordable Care Act, Occupational Health and Safety Act, Federal Insurance Contribution Act, unemployment insurance and workers' compensation laws, to name a few.
Notably, the DOL is not alone in its focus on independent contractor misclassification. Plaintiffs' lawyers, too, are focused on these claims, with an increasing number of class and collective action lawsuits following in their wake. Recent, high-profile court cases against FedEx, Uber and Lyft highlight the perils of misclassification.
Employers should proceed with caution when deciding whether to treat a worker as an independent contractor rather than an employee. Employers should also regularly audit current and on-going independent contractor relationships to ensure compliance. Additionally, employers should closely monitor on-going independent contractor relationships to ensure that even those workers who initially may have been properly classified as independent contractors have not transitioned into a role that merits classification as employees.