Department of Labor Spells Out Broad Test of Whether a Worker Is an Employee

Advice, Minimum Wage
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sealEmployers are trying to compete and seeking higher profits by cutting costs. Sometimes the costs that are cut are worker salaries, which may be replaced, legitimately or not, by independent contractors. These contractors, if legitimately used to perform work, are not entitled to wages, overtime, work breaks, benefits, workers’ compensation, or unemployment insurance benefits. The problem many Americans encounter is that the change from employment to contractor status is done illegally, resulting in substantial pay cuts.

The federal Department of Labor (DOL) published an interpretation of the Fair Labor Standards Act (FLSA) in July emphasizing that the law should be broadly interpreted to protect employees against misclassification as independent contractors, which would result in lower wages and the loss of benefits and legal protections. The FLSA covers who is entitled to wages under federal law (states have their own similar laws).

The official interpretation by DOL’s Wage and Hour Commissioner David Weil and a blog explaining it were both published on July 15. In the blog, Weil states the goal of the new interpretation is to provide clarity for employers in the hopes a better understanding will result in fewer violations of the law.

The Economic Realities Test

The interpretation states that, because of the broad nature of the statute, most workers are employees under the FLSA. Whether someone is an employee under the FLSA is a legal question decided by an “economic realities” test.

  • The test looks at the nature of the relationship between the employer and the worker, not any agreement between the parties.
  • The purpose of the test is to determine whether a worker is economically dependent on the employer (if so, he or she would be an employee) or is truly in business for himself or herself (and would be an independent contractor).

The FLSA defines “employ” as “to suffer or permit to work,” and this term is viewed through the “economic realities” test, which is broader than a common law (judge-made) control test—a test that Congress rejected when the law was enacted. The analysis should focus on whether the worker is economically dependent on the employer or truly in business for himself or herself. This test has several sections.

1. Is the Work an Integral Part of the Employer’s Business?

Is the worker integrated into an employer’s business? If the work performed is integral to the employer’s business, it’s more likely that the worker is economically dependent on the employer and is an employee. Work can be integral to a business if the work is just one component of many for the business.

2. Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?

work2The focus is whether the worker’s managerial skill affects his or her profit and loss. If in business for himself or herself, the worker’s managerial skill affects opportunities for profit or loss beyond the current job. Working more hours has nothing to do with managerial skill and determines how much an employee makes. The more important the worker’s managerial skill, the more likely he or she is an independent contractor.

3. How Does the Worker’s Relative Investment Compare to the Employer’s Investment?

An independent contractor should make some investment beyond any particular job (and bear some risk for a loss), such as furthering the capacity to expand the number of customers, reduce costs, or increase his or her market. The independent contractor’s investment shouldn’t be relatively minor compared with that of the employer. If it is, it would appear the worker and the employer are not on similar footing, and the worker may be economically dependent on the employer and be judged an employee.

4. Does the Work Performed Require Special Skill and Initiative?

The worker’s business skills, judgment, and initiative, not technical skills, should be looked at when determining whether the worker is an independent contractor.

5. Is the Relationship Between the Worker and the Employer Permanent or Indefinite?

If the nature of the relationship is permanent or indefinite, it would appear that the worker is an employee. Someone running his or her own business normally works on projects or tasks then moves on to do the same for others. Most employees work with the understanding that if all goes well, the work may continue into the future. However, the DOL states even if permanence is lacking, the reason needs to be looked at to determine the person’s status.

6. What Is the Nature and Degree of the Employer’s Control?

workAn independent contractor must actually—not theoretically—control meaningful aspects of the work as if he or she is conducting an independent business. The DOL states even those working at home, on a schedule they set themselves without direct supervision, could still be employees: these are typical arrangements for homeworkers, so they are not significant when determining their status.

The DOL states that these factors shouldn’t be used mechanically and that no one factor should be given too much weight. Each factor should be considered in the overall goal of determining whether the worker has his or her own business (so is an independent contractor) or is economically dependent on the employer (and would be an employee).

Summing It Up

If you feel the business paying you is not following the FLSA and is denying you rights you’re entitled to under the law because you’ve been misclassified as an independent contractor, contact our office. As you can see, whether someone is an employee or not may not be a clear-cut issue.

  • Each case is determined on its own facts.
  • If you signed an agreement acknowledging that you’re an independent contractor or if you’re treated as such for tax purposes, it won’t necessarily affect your case.
  • The law should be interpreted broadly, with the burden falling to the company to prove that you’re an independent contractor.

Don’t let yourself fall victim to a company’s policies that play fast and loose with employment law. If you’re an employee, no matter how you may be labeled, you have rights that shouldn’t be ignored.