Department of Labor Cracks Down on Misclassification of Employees As Independent Contractors
The classification of employees as independent contractors is being increasingly scrutinized. The U.S. Department of Labor’s Wage and Hour Division (DOL) issued an “Administrator’s Interpretation” on July 15, 2015, which concludes that numerous “independent contractors” should be re-classified as employees under the Fair Labor Standards Act (FLSA). This Interpretation could impact various payroll and fringe benefit liability for employers.
The Interpretation defines “independent contractor” in such a way that certain persons previously classified as independent contractors should now be properly classified as employees. In the Interpretation, the DOL adopts the “economic realities” test as its preferred approach to determining whether a worker is an employee or independent contractor. This test includes the following factors:
- the extent to which the work performed is an integral part of the employer’s business (the more integral, the more likely the worker will be deemed an employee);
- the worker’s opportunity for profit or loss depending on his or her managerial skill (the more opportunity, the more likely the worker will be deemed an independent contractor);
- the extent of the relative investments of the employer and the worker (the more a worker invests, the more likely the worker will be deemed an independent contractor);
- whether the work performed requires special skills and initiative (the more specialized, the more likely the worker will be deemed an independent contractor);
- the permanency of the relationship (the more permanent, the more likely the worker will be deemed an employee); and
- the degree of control exercised or retained by the employer (the more control, the more likely the worker will be deemed an employee).
The new Interpretation creates substantial challenges for businesses who wish to treat certain workers as independent contractors. Previously, businesses typically could rely upon how closely the employer could control a worker, such as by setting hours and providing tools. The new Interpretation appears to shift the focus to a worker’s economic relationship with the business. Importantly, entering into independent contractor agreements does not necessarily protect a business from liability. DOL auditors will look at what is perceived to be the economic relationship between the parties rather than defer to any agreement between the parties.
The DOL has allocated increased resources to auditing employers for misclassifications of workers as independent contractors. Employers found to have improperly classified workers are at risk for liability for matters such as retroactive Social Security and Medicare payments, unemployment and workers’ compensation insurance, and exclusion from fringe benefits such as health and retirement plans.
The first step to an employer’s best defense against threatened DOL enforcement action is an attorney-client privileged review of current workers’ classifications. Contact the attorneys at Critchfield, Critchfield & Johnston, Ltd. to evaluate your independent contractor arrangements for compliance with the new Interpretation.
For additional information and guidance on Independent Contractor Arrangements please contact an attorney at Critchfield, Critchfield & Johnston, Ltd., at 1-800-686-0440.