“Another classification issue that received a great deal of attention in 2015, and which will continue to be a thorn in the side of employers, is the distinction between employee and independent contractors. In 2015, the Department of Labor (DOL) issued guidance on the determination of whether a worker is an employee or an independent contractor. Specifically the report analyzed the FLSA’s definition of “employ” and the application of the “economic realities” test, used by federal district courts. The DOL’s guidance is important as the misclassification of independent contractors has significant financial implications.
The FLSA defines “employ” as “to suffer or permit to work.” The economic realities test focuses on six factors to determine if the worker at issue is economically dependent on the employer or is actually in business for him or herself.
The six factors which make up the economic realities test are:
1. Whether the work performed is an integral part of the employer’s business;
2. Whether the worker’s opportunity for profit or loss is affected by this managerial skills;
3. The extent of the worker’s investments relative to those of the employer;
4. Whether the work performed requires special skills and initiative;
5. The level of permanence in the relationship; and
6. The degree of control the employer exercises or retains over the workers.
The DOL has emphasized that all six factors must be considered and that no single factor is dispositive of a worker’s employee status. Interestingly, the sixth factor, the “degree of control” is the common law test; nevertheless, the DOL has advised that it should not be given “undue weight.”
Employers must be aware of all six factors and cognizant that despite a written agreement and regardless of label given to the individual, the working relationship must satisfy the economic realities test. Best-practices mandate that the employer reevaluate their independent contractor relationships for continuing compliance. Finally, employers must know that employee status under the FLSA is broadly construed in favor of the worker being considered an employee. “