The U.S. Department of Labor (DOL) issued new guidance on the classification of independent contractors as employees under the Fair Labor Standards Act (FLSA).  The DOL Administrator’s Interpretation (AI) sets yet another shadow on a fading classification of workers.  There are many independent contractor vs employee classification “tests” available from the IRS, the state Employment Development Department and the courts.  Although the DOL document is not law, it may be used as another tool for the DOL to make decision on matters that come before them. 

The DOL’s opinion sets forth that most US workers are employees rather than independent contractors and must be accorded all the rights and privileges of employment, including minimum wage, overtime, unemployment and workers’ compensation. 

The DOL uses an economic realities test, rather than focusing on the employer’s right of control over the worker. The economic realities test analyzes whether a worker is economically dependent on the employer (therefore an employee under the FLSA) or is truly in business for himself as an independent contractor.

The FLSA defines an employee as “any individual employed by an employer” and defines employ to mean “suffer or permit to work.” The following six factors (along with a brief AI explanation) are considered in determining whether a worker is economically dependent on the employer:

  • Is the work performed by the individual 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 . . . .  A true independent contractor’s work, on the other hand, is unlikely to be integral to the employer’s business.
     
  • Does the individual’s “managerial skill” affect his or her opportunity for profit or loss?  In considering whether a worker has an opportunity for profit or loss, the focus is whether the worker’s managerial skill can affect his or her profit and loss.  The AI  further explains that this factor should not focus merely on the worker’s ability to work more hours, but whether the worker exercises managerial skills and whether those skills affect the worker’s opportunity for both profit and loss.
     
  •  How does the worker’s investment compare to that of the company?  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.  An independent contractor typically makes investments that support a business as a business beyond any particular job. 
     
  • 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?  Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee. After all, a worker who is truly in business for him or herself will eschew a permanent or indefinite relationship with an employer and the dependence that comes with such permanence or indefiniteness.
     
  • 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 DOL states that no one factor will determine whether a worker is an employee.  This changes the picture of the former “right to control work” standard used in these evaluations.  All the factors must be examined in a qualitative, not quantitative, manner.

If you have independent contractors or are considering adding them to your workforce, we encourage you to speak with legal counsel.  SB 459 places even more liability for CA employers and non-attorneys who misclassify workers as independent contractors.

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