Misclassifying of Independent Contractors Targeted in Pact Between PA and US Department of Labor

August 9, 2016Alerts Labor and Employment Alerts

In an effort to combat the misclassification of certain workers as “independent contractors,” the Pennsylvania Department of Labor & Industry (DLI) and the U.S. Department of Labor (DOL) signed a “Memorandum of Cooperation” on August 4, 2016 which is effective for three years.

For Pennsylvania businesses — especially those in the construction, telecommunications, hospitality, janitorial, and health care industries — the Memorandum sets the stage for intensified enforcement of worker classification rules.

Signed by representatives from DLI’s Bureau of Labor Law Compliance and DOL’s Wage and Hour Division, the Memorandum is one of many between the DOL and various state agencies as part of “The DOL Misclassification Initiative.” This initiative began in 2011 with an Agreement between the DOL and Internal Revenue Service to address the perceived wrongful classification of workers in certain industries as independent contractors as opposed to employees.

Since 2011, the DOL has partnered with more than 30 states through similar agreements to share information and cooperate in the enforcement of the Fair Labor Standards Act (FLSA) and state wage and hour laws.  

In addition to initiating enforcement actions throughout the country, the DOL’s Wage and Hour Division has issued Memoranda, called “Administrator’s Interpretations,” setting forth the DOL’s interpretation of the differences between an employee and an independent contractor. These memoranda make clear that the DOL’s Wage and Hour Division views misclassification as a pervasive problem, and that the DOL intends to take an aggressive enforcement approach toward the issue.

What Pennsylvania employers need to know:

No Change in the Law. The Memorandum does not represent a change in the FLSA or Pennsylvania wage and hour laws. It simply means that the classification of workers as employees vs. independent contractors will become an investigation priority for the DLI over the next several years.

Hiring Independent Contractors is Legal. An employer does nothing wrong or unlawful by legitimately classifying certain workers as independent contractors. However, businesses that operate in the industries mentioned above or that rely upon independent contractors as an important part of their workforce must be especially diligent in their efforts to properly classify workers.   

It Is Up to the Courts, Not the DOL. The legal determination of whether a worker has been properly classified as an independent contractor is one ultimately made by the courts, not the DOL or the DLI. This determination is based on numerous factors and looks to the “economic realities” of the relationship between the worker and the employer.

Employee or Independent Contractor? Under the FLSA and Pennsylvania law, courts look to several factors to determine if a worker is an employee or an independent contractor. Six of the most common factors are:

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

Other factors that may be considered include, but are not limited to: whether the employer provides training necessary for the job; the extent to which the employer monitors or supervises the worker; and whether the worker is able to pursue other kinds of work, or work with other companies (exclusivity). Normally, whether a worker is called an “employee” or an “independent contractor” does not control.

Prevention is Critical. If a DOL/DLI enforcement action or private litigation results in a determination that a company has misclassified workers as independent contractors, the employer could be subject to paying statutory penalties in addition to back pay in the form of unpaid wages and/or overtime.

Therefore, it is critical for employers to review the classification of their workforce and determine whether that classification complies with the FLSA and Pennsylvania law. Taking the time to plan and assess any risks in your business model today will help to prevent the headaches of litigation and of potentially costly judgments in the future.