Close on the heels of its proposed regulatory amendments to afford overtime rights to far more employees, the Department of Labor (DOL) has issued an Administrator’s Interpretation that significantly broadens the group of workers who will be classified as employees rather than independent contractors. The new Interpretation, issued on July 15, 2015, formally adopts an “economic realities” test, which focuses on whether the worker is economically dependent on the employer or truly in business for him or herself. This test uses six factors, none of which is determinative:
1. Is the work an integral part of the employer’s business;
2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss;
3. How does the worker’s relative investment compare to the employer’s;
4. Does the work require special skill and initiative;
5. Is the relationship permanent or indefinite; and
6. The nature and degree of the employer’s control.
The Interpretation acknowledges that under this test, “most workers are employees under the FLSA.”
This Interpretation is likely to trigger a host of individual, class and representative actions by workers – not only those who are intentionally misclassified by employers seeking to reduce labor costs, but also by workers who were initially pleased with the advantages of independent contractor status but who have become disenchanted with the vagaries of being in business for oneself.
Employers should take a close look at workers who are classified as independent contractors and balance the risk of continuing that classification with the possibility of expensive litigation and related back pay, tax and other payroll-driven obligations, penalties, and attorneys’ fees.
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