Snell & Wilmer
Legal Alert

July 23, 2015

Wage and Hour Division Targets Independent Contractors
by John Lomax

Last week, the U.S. Department of Labor’s Wage and Hour Division released an Administrator’s Interpretation providing guidance on the misclassification of workers as independent contractors. The guidance sets forth a comprehensive assessment of how employers and courts should interpret the Fair Labor Standards Act (FLSA) – which governs overtime and minimum wage standards – in determining whether workers are employees or independent contractors. While demand-economy workers and companies are not mentioned by name, the guidance tackles many of the arguments that have been advanced recently to justify the use of independent contractors. The Interpretation stresses two key points: i) the FLSA’s economic realities test governs the analysis and focuses on whether the worker is economically dependent on the employer or is in business for him or herself; and ii) while several factors may be considered in making that determination, “no one factor (particularly the control factor) is determinative of whether a worker is an employee.”

Companies that use independent contractors should review their agreements, the nature of their relationships and the evolving law in this area to ensure their continued use is warranted. Companies can defend their model or consider whether to change the model. Unfortunately, the Interpretation offers no guidance on how companies using independent contractors can convert them to employee status. That is one of the more challenging issues with companies that begin with one model and then later have to evaluate how to change to an employee model. Employers can and have changed models and converted workers, but they must be cognizant of the risks associated with that process.

The Interpretation uses examples and discusses cases where the use of independent contractors has been challenged in recent years. Those include home health services, janitorial services, construction and cable installers. To anyone following Wage and Hour’s efforts in this area, it references some of the targeted industries. Other industries using independent contractors, like transportation companies – think Uber – are not mentioned. The question of whether a worker is an employee or independent contractor is not often as easily disposed of as the Interpretation suggests. In part, the challenges of properly classifying workers stem from the various laws and federal and state agencies implicated by the classification. For example, the IRS has its own test for determining whether a worker is an employee or independent contractor, and each state makes those determinations for purposes of determining whether a company has to provide workers’ compensation insurance coverage or pay unemployment taxes on the worker. States often rely on a common law control test in making those determinations. A benefit of the guidance is we now have recent guidance from Wage and Hour on how it evaluates whether a worker is properly classified.

Among the major points of the guidance are:

  • The FLSA’s definition of “employ” is broadly defined as “to suffer or permit to work,” and that standard encompasses a worker who is dependent on the entity for work.
  • Whether the company or worker “controls” the means and manner of production is but one of many factors and should not be given undue weight.
  • Workers who perform the integral work of the alleged employer are more likely to be employees, and such work can be integral to the employer’s business even if performed away from the employer’s place of work.
  • Does the worker’s managerial skill affect his or her profit and loss? The worker’s ability to work more hours and the amount of work available from the employer has nothing to do with the worker’s managerial skill, according to Wage and Hour.
  • Compare the relative investment the worker makes to the investment the company makes; if the investment is relatively minor, that suggests the worker may be economically dependent on the employer, and thus, an employee.
  • Permanency or indefiniteness in the worker’s relationship with the employer suggests dependence and status as an employee.

Bottom line, in the eyes of the Wage and Hour Division, independent contractors who work for a single organization and cannot demonstrate they are in business for themselves should be treated as employees entitled to the minimum wage and overtime protections.




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