The U.S. Department of Labor (DOL) issued a memorandum on July 15, 2015 to provide additional guidance on how the Fair Labor Standard Act (FLSA) applies its standards to classify a worker as an employee or independent contractor. The DOL issued the memo in response to an increasing number of employers intentionally misclassifying workers as independent contractors to cut costs and avoid compliance with labor laws.
In their memo, the DOL explains that the FLSA defines employ as “to suffer or permit to work”, which is intentionally broad in order to adequately protect workers and enforce labor laws. A worker is “suffered or permitted to work” by the employer if they are economically dependent on an employer. In order to determine whether a worker is economically dependent on an employer, the FLSA applies “economic realities factors”. The economic realities factors include: (A) the extent to which the work performed is an integral part of the employer’s business; (B) the worker’s opportunity for profit or loss depending on his or her managerial skill; (C) the extent of the relative investments of the employer and the worker; (D) whether the work performed requires special skills and initiative; (E) the permanency of the relationship; and (F) the degree of the control exercised or retained by the employer.
The memo provides in depth analysis and case law examples of each of the economic realities factors, but emphasizes that each factor is examined and analyzed in relation to one another, no single factor is determinative, and each factor should be considered in light of the ultimate determination of whether the worker is really in business for him or herself (and thus is an independent contractor) or is economically dependent on the employer (and thus is an employee). The factors should be used as guides to answer the ultimate question of economic dependence to correctly classify workers and determine the legal protections the workers receive.
It is important to classify your employees correctly as the penalties can be significant. Penalties include reimbursement of unpaid overtime and minimum wages for up to two years or even three if the misclassification was willful, liquidated damages equal to that amount and attorney fees. Not only will the DOL impose penalties if you are misclassifying employees as independent contractors it is likely you have not withheld federal and state income taxes which can result in both company and personal liability. As with the DOL penalties the penalty is doubled.
Click here to view the memorandum.
If you need additional guidance in this area for your business, please contact one of our employment and labor partners, Maribeth Meluch