The Administrator of the Wage and Hour Division of the United States Department of Labor (WHD) recently issued a new interpretation regarding when workers are “employees” versus “independent contractors” under the Fair Labor Standards Act (FLSA). According to the Administrator, “most workers are employees under the FLSA,” thus are entitled to receive the minimum wage, overtime, and the other protections afforded under the Act as applicable. In reaching this conclusion, the Administrator stated that the very broad “suffer or permit to work” standard under the FLSA and the Act’s intended expansive coverage for workers must be considered when applying the “economic realities factors” to determine whether a worker is an employee or an independent contractor.
The definition of “employ” under the FLSA includes to “suffer or permit to work.” An “entity ‘suffers or permits’ an individual to work if, as a matter of economic reality, the individual is dependent on the entity.” The multi-factorial “economic realities” test used by courts in determining whether a worker is an employee or an independent contractor focuses on whether the worker is economically dependent on the employer or in business for him or herself. These factors include: (1) the extent to which the work performed is an integral part of the employer’s business, (2) whether the worker’s managerial skills affect his or her opportunity for profit and loss, (3) the relative investments in facilities and equipment by the worker and the employer, (4) the worker’s skill and initiative, (5) the permanency of the worker’s relationship with the employer and (6) the nature and degree of control by the employer.
These factors should not be analyzed mechanically or in a vacuum—according to the Administrator, no single factor, including control, should be over-emphasized. Instead, each factor should be considered in light of the ultimate determination of whether the worker is really in business for him or herself (and thus is an independent contractor) or is economically dependent on the employer (and thus is its employee). Analyzing the “economic realities” test in hand with the broad “suffer or permit to work” standard, the Administrator analyzed the following economic realities factors and made the following conclusions:
- Is the Work an Integral Part of the Employer’s Business? –“If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer.”
- Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss? –“The worker’s managerial skill will often affect opportunity for profit or loss beyond the current job, such as by leading to additional business from other parties or by reducing the opportunity for future work.”
- How Does the Worker’s Relative Investment Compare to the Employer’s Investment?—“The worker should make some investment (and therefore undertake at least some risk for a loss) in order for there to be an indication that he or she is an independent business.”
- Does the Work Performed Require Special Skill and Initiative? –“A worker’s business skills, judgment, and initiative, not his or her technical skills, will aid in determining whether the worker is economically independent.”
- Is the Relationship between the Worker and the Employer Permanent or Indefinite?—“Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee.”
- What is the Nature and Degree of the Employer’s Control?—“The worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business.”
In light of the WHD Administrator’s stringent interpretation, here are a few suggestions to employers seeking to ensure proper classification of workers:
- Engage in a meaningful analysis of the services provided by the worker to determine whether the work being performed is integral to the employer’s business and consider hiring employees when such work is the cornerstone of the services or products offered by the business.
- When engaging independent contractors, have a clear agreement setting forth the terms of the relationship—do not attempt to control the activities of independent contractors through personnel handbooks or other policies and procedures which generally apply to employees. The terms of an independent contractor arrangement should be spelled out in the written agreement.
- Do not provide independent contractors with tools without offsetting the cost with a fee or itemized deduction from the worker’s fee which should be paid only after the receipt of an invoice.
- Try to limit independent contractor arrangements to workers who have established businesses and advertise their services to the public.