DOL ADDRESSES MISCLASSIFICATION OF EMPLOYEES AS INDEPENDENT CONTRACTORS

Classifying workers as independent contractors has several advantages for employers. For example, independent contractors are not entitled to minimum wage or overtime compensation under the Fair Labor Standards Act. Employers are not required to provide benefits such an unemployment insurance, worker's compensation coverage, or health insurance to independent contractors. Nor are companies required to pay employment taxes on independent contractors. Given these advantages, many employers may be tempted to simply label workers as independent contractors, without giving much thought as to whether they truly meet the standard for such classification.

Over the past several years, both the federal Department of Labor (DOL) and Internal Revenue Service (IRS) have ramped up efforts to investigate the misclassification of employees as independent contractors. As a consequence, the number of employers misclassifying their workers has steadily increased - - as has the amount of damages recovered on behalf of those workers.

On July 15, 2015, David Weil, the Administrator for the DOL, Wage and Hour Division, issued his Administrator's Opinion* concerning the misclassification of employees as independent contractors. Moving forward, the DOL will consider six "economic realities factors" to determine whether an individual should properly be classified as an employee or independent contractor. These factors include the following:

1. The extent to which the work performed is an integral part of the Employer's business.
2. The worker's opportunity for profit or loss depending on his or her managerial skill.
3. The extent of the relative investments of the Employer and the worker.
4. Whether the work performed requires special skills and initiative.
5. The permanency of the relationship. 
6. The degree of control exercised or retained by the Employer.

No single factor is to be given greater weight than any other factor. Rather, these six factors are to be evaluated as a whole in determining the economic independence (or lack thereof) of the worker.

The core factors that this six-factor test evaluates are very similar to the 11-factor test utilized by the IRS. In the end, Administrator Weil explained, this test is intended to determine whether a particular worker is truly independent or, on the other hand, is economically dependent upon the Employer (and thus an employee).

The misclassification of employees as independent contractors is a hot-button topic which continues to be of keen interest to both the DOL and IRS. As such, Employers are cautioned to carefully examine each job position before determining whether it should be classified as an employee or independent contractor. Also note that documents such as job descriptions and independent contractor agreements may serve as valuable evidence in assessing how a particular job should be classified. 

* In March 2015, the U. S. Supreme Court ruled that federal agencies are allowed to issue interpretative guidelines addressing rules, without the need to engage in formal notice-and-comment procedures.

If you have questions about this Employment Law Alert or wish to discuss the impact of this decision upon your business, please do not hesitate to contact Maury Nicely at Evans Harrison Hackett PLLC, 423/648-7851 or mnicely@ehhlaw.com.