Insights & News

Employment NewsFlash, July 2015
Key Takeaways from DOL’s Independent Contractor Opinion

July 15, 2015
Client Alert
Many businesses continue to struggle with whether to classify a worker as an employee or independent contractor, with risks of misclassification ranging from tax liability to insurance gaps to wage-payment collective actions. Varying tests for independent contractor status have evolved over the years through tax opinions, federal and state statutes, and a network of federal and state common law court decisions.

The U.S. Department of Labor has now weighed in on the issue with its own Administrator’s Interpretation of the federal Fair Labor Standards Act. Key takeaways from the DOL’s publication include:

  • The DOL views the definition of “employee” as “expansive” and finds that “most workers are employees.”
  • According to the DOL, employers often place too much emphasis on the control exerted over workers in determining whether they may be classified as independent contractors. Instead, employers should focus on the “economic realities” of the situation, which includes an analysis of factors such as (a) the extent to which the work performed is an integral part of the employer’s business; (b) the worker’s opportunity for profit or loss depending on his or her managerial skill; (c) the extent of the relative investments of the employer and the worker; (d) whether the work performed requires special skills and initiative; (e) the permanency of the relationship; and (f) the degree of control exercised or retained by the employer.
  • The DOL recognizes that tests for contractor status may differ depending on applicable legal decisions in the jurisdiction in which the business operates or the particular law under consideration.
  • In the DOL’s view, “an agreement between an employer and a worker designating or labeling the worker as an independent contractor is not indicative of the economic realities of the working relationship and is not relevant to the analysis of the worker’s status.”
  • In addition to misclassifying employees as independent contractors, an increasing number of businesses in the DOL’s opinion are mislabeling workers as non-employee “owners,” “partners,” or “members of a limited liability company.”
  • The DOL Administrator’s Interpretation comes on the heels of the DOL’s recently proposed new overtime rule, which if approved as drafted would expand the categories of employees eligible for overtime pay. The DOL has now made clear that a business cannot avoid the potential financial or administrative impact of the new proposed overtime rule simply by re-classifying workers as independent contractors.
Businesses working with independent contractors should consult with appropriate human resources and employment advisers to develop strategies to minimize the risk of misclassification. Stradley Ronon also recently published guidance for businesses in working with independent contractors, which is available here.

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