In furtherance of its agenda to extend minimum wage and other wage-hour protections as broadly as possible, on July 15, 2015, the Department of Labor issued a far-reaching interpretive memorandum expressing the DOL’s belief that “most workers [classified as independent contractors] are employees under the FLSA’s broad definitions.”

According to the DOL, the 15-page memorandum (entitled “Administrator’s Interpretation No. 2015-1”) was issued in the context of “numerous complaints from workers alleging misclassification,” and the DOL’s “successful enforcement actions against employers who misclassify workers.”  The DOL states “additional guidance regarding the application of the standards for determining who is an employee under the Fair Labor Standards Act . . . may be helpful to the regulated community in classifying workers and ultimately curtailing misclassification.”

The DOL’s guidance consists of adopting the “economic realities” test in assessing whether a worker classified as an independent contractor legally qualifies as an employee, but making clear that this test should be applied in the context of the FLSA’s broad definition of “employ” as “suffer or permit to work.”  Moreover, according to the DOL, a worker who is “economically dependent on an employer is suffered or permitted to work by the employer,” and thus should be classified as an employee.  The “suffer or permit” standard was “specifically designed to ensure as broad of a scope of statutory protection as possible.”

Although the factors that constitute the “economic realities” test vary slightly, the DOL interprets them as follows:

  • Is the work performed by the individual an “integral part of the employer’s business?”  If workers perform services that the company is in the business of providing (workers answering phones at a call center is one example provided in the memorandum), they are more likely to be considered employees.
  • Does the individual’s “managerial skill” affect his or her opportunity for profit or loss?  A worker, who has the opportunity to hire others or purchase equipment and materials in order to increase profit, is more likely to be considered independent.  A worker’s ability to simply work more hours to increase compensation, by contrast, does not reflect managerial skill and does not distinguish a worker as an independent contractor.
  • How does the worker’s investment compare to that of the company?  Workers should make some significant investments in the business in order to be considered an independent contractor in business for him or herself.
  • 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 company permanent or indefinite?  A long-term relationship between the parties suggests the worker is an employee.  According to the DOL, a worker truly in business for him or herself, “typically works one project for an employer and does not necessarily work continuously or repeatedly for an employer.”
  • 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.”  The DOL emphasizes that “the ‘control’ factor should not play an outsized role in the analysis of whether a worker is an employee or an independent contractor… the FLSA covers workers of an employer even if the employer does not exercise the requisite control over the workers, assuming the workers are economically dependent on the employer.(Emphasis added.)

To be clear, the memorandum represents the DOL’s opinion regarding the law on the independent contractor vs. employee issue.  It is not the law and is not legally binding on courts interpreting the law.  Nevertheless, the memorandum is significant because courts often give deference to an agency’s interpretation of a statute or regulation that the agency is tasked with enforcing.  Further, the memorandum signals the DOL’s intention to aggressively pursue enforcement actions against companies that utilize independent contractors.  Indeed, the memorandum comes on the heels of actions by state legislatures (including California) to impose additional penalties on companies that misclassify workers as independent contractors.

In light of this pronouncement by the DOL, companies would be wise to review their independent contractor relationships against the interpretations in the memorandum and re-evaluate the independent contractor relationships vulnerable to the DOL’s broad interpretation.  Employers should reach out to counsel with additional questions or concerns regarding classification of employees or independent contractors if they are uncertain about their workers’ classification.  The DOL has made abundantly clear that it is paying attention.

Sheppard Mullin’s Labor and Employment Practice Group has a team of attorneys ready to assist in the creation, implementation, and maintenance of compliant independent contractor relationships.