On July 15, 2015, the United States Department of Labor (DOL) issued a memorandum on “The Application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who are Misclassified as Independent Contractors.” After clarifying the distinction between an employee and an independent contractor and emphasizing that the Fair Labor Standards Act’s (FLSA) definition of “employment” is expansive and covers working arrangements other than what both employers and workers have traditionally considered an employer/employee relationship, the report concludes with the DOL’s statement that “most workers are employees under the FLSA’s broad definitions.”
For the past several years, the DOL has steadily increased its scrutiny of employers’ characterization of its workers with an eye to identifying workers incorrectly classified as independent contractors, when in fact they are employees. In 2011, the DOL allotted $25 million toward a multi-agency “Misclassification Initiative” to “strengthen and coordinate Federal and State efforts to […] identify and deter misclassification of employees as independent contractors.” The DOL’s misclassification budget has significantly increased in more recent years and its Wage and Hour Division has hired hundreds of additional investigators to handle an ever-increasing number of complaints and investigations of possible misclassification.
What’s the big deal? Independent contractors have always been a strong thread in the fabric of the US economy, offering employers critical specialized services and cost savings, along with a workforce flexibility crucial to businesses both large and small during tough economic times. Therein lies the answer – the distinction between employee and independent contractor is a big deal because organizations who hire independent contractors are not bound by minimum wage or overtime pay requirements, nor are they required to provide contractors with health insurance, retirement benefits, or paid or unpaid leave. Moreover, employers are not liable for payroll taxes, Social Security, unemployment and workers’ compensation insurance when they utilize independent contract workers. In sum, employers working with independent contractors are estimated to save 20-30 percent of the cost of hiring full-time employees.
The FLSA’s definition of “employ” as “to suffer or permit to work” encompasses a broad spectrum of employer/worker arrangements that require an analysis of the “economic realities” of the relationship to determine whether the worker is an employee or an independent contractor. The “economic reality” factors include: (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 did not, in its July 15, 2015 guidance, change the analysis employers must undertake in classifying their workers as employees or independent contractors. However, given the steady increase in misclassification cases filed by employees and the Wage and Hour Division’s determination, in case after case, that workers have been incorrectly labeled as contractors, the memorandum serves as a sobering reminder that employee misclassification can be very costly for employers.
Employers must exercise caution not only in classifying their workers as either employees or independent contractors; they must also be careful in determining whether the employers are correctly classified as exempt or non-exempt for purposes of the FLSA overtime pay requirements. This is particularly true in light of the DOL’s announced proposed rulemaking – likely to go into effect in early 2016 – that will more than double the salary threshhold for exempt status and require employers to either increase salaries or reclassify employees as non-exempt and pay overtime. FLSA enforcement actions are on the rise, and prudent employers will take the time and effort necessary to critically assess their worker classifications before the DOL undertakes to do it for them.