The Department of Labor (DOL) recently issued a guidance memo declaring that “most workers are employees” under the Fair Labor Standards Act (FLSA). The guidance, an Administrator’s Interpretation issued by Wage and Hour Division Administrator David Weil, is part of the DOL’s continuing crusade against misclassifying employees as independent contractors, which is intensifying in part due to the proliferation of app-based companies built on the worker as independent contractor business model.
Kellen Myers, an attorney with Detroit-based management side labor and employment law firm Nemeth Law PC, analyzes Weil’s focus on the economic realities test to determine if an individual is an employee or independent contractor.
“The economic realities test is based on six factors and Weil’s application of those factors results in a much more expansive interpretation of classifying individuals as employees under the FLSA,” Myers said.
The 6 factors of the economic realities test as discussed by Weil are:
1. Is the work an integral part of the employer’s business?
Weil emphasized this factor is “compelling” and, “whether the worker’s work is an integral part of the employer’s business should always be analyzed in misclassification cases.” According to Weil, the more integral the worker’s work is to the employer’s business, the more likely the worker is an employee and not an independent contractor.
2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
This factor examines whether a worker exercises managerial skills and to what degree the exercise of those skills affects his or her ability to make a profit or experience a loss. Accordingly, a worker’s ability to work more
hours or the amount of work available should have no bearing on this part of the analysis.
3. How does the worker’s relative investment compare to the employer’s investment?
This factor looks at the nature and extent of the relative investments of the employer and worker. Weil stressed that a worker’s investment should not be considered in isolation; rather, must be compared to the investment an employer makes to the overall business. So “…even if the investment is possibly a business investment, the worker’s investment must be significant in nature and magnitude relative to the employer’s investment in its overall business.” If the person’s investment reaches such a level, this factor tips in favor of the person being classified as an independent contractor. If not, the person is more likely to be classified as an employee. The Administrator referenced a case where the Tenth Circuit determined that rig welders’ investments in equipped trucks costing between $35,000 and $45,000 did not necessarily mean the rig welders were independent contractors. When compared to the employer’s investment of hundreds of thousands of dollars per worksite, there was a significant disparity in investment amounts between the workers and the employer.
4. Does the work performed require special skill and initiative?
Weil stated, “A worker’s business skills, judgment, and initiative, not his or her technical skills, will aid in determining whether the worker is economically independent.” Meaning, significant weight is placed on whether the person has business skills rather than technical skills.
5. Is the relationship between the worker and the employer permanent or indefinite?
Generally, the more permanent or fixed the worker’s relationship is with the employer, the more likely the worker is an employee. But Weil said where there is no permanent relationship with an employer, it is only indicative of independent contractor status if it is because of the worker’s own independent business initiative and does not result from the employer’s operational characteristics (such as providing seasonal work or temporary work assignments).
6. What is the nature and degree of the employer’s control?
Weil said under the economic realities test (as opposed to the control test) the control factor should almost never play a significant role in determining if someone is an independent contractor versus an employee. However, he did say that, generally, the more control a worker exercises over meaningful aspects of the work, the more likely that worker is an independent contractor.
The economic realities test’s bottom line is, “What is the economic reality for the worker? According to Weil, a worker who is economically dependent on an employer is always an employee under the FLSA. Thus, the ultimate consideration when applying the economic realities test is whether the worker is economically dependent upon the employer or in business for him or herself. No single factor under the test is determinative. Weil concluded by stating the broad definition of employment under the FLSA and the Act’s intended expansive coverage for workers results in most workers being employees and not independent contractors under the Act.
Myers said although DOL Administrator’ Weil’s interpretation is merely guidance and does not have force of law, courts frequently give deference to agency interpretations of the statutes they enforce.
“Employers need to be concerned. Based on this recent interpretation, many more employers will be required to pay overtime, payroll taxes, employee benefits, etc. Employers should consider whether they need to review their independent contractor agreements and policies, re-examine their existing independent contractor relationships, and work with legal counsel to conduct privileged audits of these relationships” Myers said.
“Further, the exploding gig economy may be hampered by the crackdown on the independent contractor, the foundation of the business model for app-based companies. It’s already taken down Homejoy, an app-based home-cleaning company from California that closed, in part, due to concerns over employee misclassification litigation.”
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