Nothing New in DOL Worker Misclassification Memo

August 13, 2015Articles Law360

Reprinted with permission from Law360. (c) 2015 Portfolio Media. Further duplication without permission is prohibited. All rights reserved.

On July 15, 2015, U.S. Department of Labor Wage and Hour Administrator David Weil issued Administrator’s Interpretation No. 2015-1 regarding “the application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who Are Misclassified as Independent Contractors.”

This memorandum makes the bold proclamation that “most workers are employees under the FLSA” and once again reiterates the DOL's position that misclassification of employees prevents workers from receiving “important work place protection such as minimum wage, overtime compensation, employment insurance, and workers’ compensation. Misclassification also results in lower tax revenues for government and an uneven playing field for employers who properly classify their workers.”

An employer “’suffers or permits’ an individual to work if, as a matter of economic reality, the individual is dependent on the [employer].” The memorandum stresses that any analysis of whether an individual is an employee or independent contractor must be viewed in this light (i.e., whether the worker is economically dependent upon the employer).

The memorandum explains, in great detail, the history of the FLSA’s definition of employment as “to suffer or permit work,” and how this was a significant — and intentional — change from the common law “control test” used to determine whether a worker was an employee. Further, Weil explained that the goal of the “suffer or permit” definition was to broaden the scope and remedial effect of the FLSA to its widest possible applicability.

The memorandum goes on to outline the “economic realities” test and the six most common factors identified by courts in their decisions regarding this test. These factors include:

  1. whether the work is an integral part of the employer’s business;
  2. whether the worker’s managerial skill affects the worker’s opportunity for profit or loss;
  3. whether the worker’s relative investment compares to the employer’s investment;
  4. whether the work requires special skills;
  5. whether the relationship is permanent or indefinite; and
  6. the nature and degree of control exercised by the employer.

Each factor is examined and explained, with citations to various watershed cases from across the country. Further, in an effort to clarify the DOL's position regarding what it believes to be common misclassification issues faced by numerous industries, various examples are offered and outlined. These examples are drawn from the industries often involved in DOL enforcement actions or lawsuits (e.g., construction, janitorial, and nursing/home health care). Each example is tied to, and used to highlight, one of the aforementioned factors of the “economic realities” test. In the example regarding the fourth factor, the distinction is made between a carpenter who frames houses full time for a single construction business vis-a-vis a highly skilled carpenter who, as needed, makes customized cabinets for multiple businesses — the former more likely being an employee, while the latter an independent contractor.

While these examples are helpful, they are limited in their applicability, as the memorandum acknowledges that "[t]he addition or alteration of any facts in any of the examples could change the resulting analysis.” And, “while the examples help illustrate the discussion of several common factors of the economic realities test, no one factor is determinative of whether a worker is an employee or independent contractor.”

The memorandum makes clear that the DOL believes misclassification of employees as independent contractors is pervasive and rampant and needs to be remedied. However, the reality is that the memorandum offers no new information or guidance to employers. The cases cited by Weil are not new or recent, nor do they signal a shift or change in long-standing precedent. Moreover, the included examples are overly simplified, and do not address the more nuanced considerations that make decisions regarding employment status more difficult to ascertain.

Over the past 10 years, the DOL and the plaintiffs’ bar have taken an increasingly aggressive approach to enforcement under the FLSA and state wage-and-hour laws, especially regarding employee misclassification issues. Filings under the FLSA between 1995 and 2005 more than doubled, and since 2005 have nearly doubled again. Statistics indicate that in 2012, in excess of 8,000 FLSA new claims were filed in federal district courts. And these statistics do not track the claims filed in state courts under state law only, or claims brought through administrative processes by state agencies.

In 2011, as acknowledged in the memorandum, the DOL's Wage and Hour Division entered into a memorandum of understanding with the IRS for the specific purpose to “send a consistent message to employers about their duties to properly pay their employees and to pay employment taxes.” The Wage and Hour Division’s website also lists the more than 20 states with which the DOL also has an agreement or understanding regarding misclassification enforcement.

As stated above, there has been no recent “sea change” is this area of the law that prompted this proclamation by Weil. Rather, this memorandum stands as the latest shot across the bow from the DOL in its ongoing Misclassification Initiative. This memorandum affirms the Wage and Hour Division’s long-standing position that “[t]he misclassification of employees as independent contractors presents one of the most serious problems facing affected workers, employers and the entire economy.” The reality remains, however, that any determination of whether a worker is an employee or an independent contractor continues to be a fact-intensive analysis using the “economic realities” test described above and thoroughly discussed in the memorandum.

So what does this all mean? Employers, especially those in the industries highlighted by the examples contained in the memorandum and/or that employ “low-wage workers,” must be especially diligent in their efforts to properly classify employees and independent contractors with whom they have a relationship, as this memorandum is clearly directed toward them as a warning. Any employer that relies upon independent contractors to support its business endeavors — even when those relationships are “advantageous for workers and businesses” — should not be surprised to find itself the target of an enforcement action.

Further, Weil's edict that “most workers are employees under the FLSA” is certain to find itself quoted in the next wave of pleadings filed in the ever-increasing FLSA actions currently pending, or soon to be filed, in federal courts. As these claims and enforcement actions continue to multiply, the risks and costs related to misclassification of employees as independent contractors will continue to increase for employers.

Reprinted with permission from Law360. (c) 2015 Portfolio Media. Further duplication without permission is prohibited. All rights reserved.