By: Laurie A. Petersen and Samantha J. Wood
The U.S. Department of Labor (“DOL”) has issued new guidance reiterating its focus on misclassification of employees as independent contractors and warning employers that “most workers are employees.”
The DOL has asserted that the purpose of its guidance is to provide clear direction to employers regarding the classification of workers as independent contractors. It asserts that employers should apply the multi-factorial “economic realities,” test, which focuses on whether the worker is truly in business for him or herself. Under this test, employers should consider and weigh the following factors: (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/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; and (6) the degree of control exercised or retained by the employer. The DOL asserts that all of the factors should be considered and weighed together in each case, and that no one factor, such as the control factor, is determinative.
While the guidance does not announce a new standard to be applied in analyzing whether a worker is an employee or independent contractor, it asserts that the application of the economic realities test should be guided by the Fair Labor Standard Act’s definition of the term “employ.” The FLSA provides an expansive scope of the employee-employer relationship by broadly defining the term “employ,” to mean “to suffer or permit to work.” Applying the economic realities test to the broad scope of the employee-employer relationship, the DOL concludes that most workers should be classified as employees under the FLSA.
In light of this guidance, employers should carefully examine their classification of workers to prepare themselves for DOL audits and protect themselves from costly misclassification litigation and liability. Indeed, if it is found that an employer misclassified employees as independent contractors, the financial consequences could include the following: liability for employment withholding taxes, failure to pay tax penalties, minimum wage, overtime compensation, unemployment insurance, workers’ compensation, and ACA penalties for failing to provide minimum essential health-care coverage.
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