DOL to Scrutinize Independent Contactor Designation

Alert:   Department of Labor issues clearest warning to date that will highly scrutinize employers’ designation of workers as independent contractors.

A little known fact that July is Department of Labor Goes After Employers month.  Or so it seems anyway.

Not to be outshone by its own proposed overtime regulations from July 6, the first in 11 years on the subject, the Secretary of the DOL on Wednesday (July 15) issued an Administrator’s Interpretation of the definition of “employ” under the Fair Labor Standards Act.  Little substantively is new as the AI builds off legal decisions over the years on who is (and is not) an employee.  In reviewing the history of the law and its enforcement the Secretary comes to this conclusion – very few workers are legitimately independent contractors.  That is to say, most everyone is an employee.

From the AI, here are the questions to consider when determining whether someone is an employee.  No one factor is more important than the others. 

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

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

   • Issue – whether the worker has the ability to make decisions and use his managerial skill and initiative to affect opportunity for profit/loss?

   • Focus not on ability to work more hours, but whether worker exercises managerial skills and whether those skills affect the opportunity for profit/loss

   • Can the worker experience a loss?

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

   • Relative investment is what matters, not just whether worker invested

   • If minor vs. employer’s investment = not an independent contractor

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

   • Relative skills – business skills, judgment, and initiative

   • Technical skills are immaterial

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

   • Is the lack of permanence or indefiniteness due to the worker’s running of her independent business?

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

   • Worker must control meaningful aspects of the work performed

   • Control over hours not indicative of independent contractor status

   • DOL no longer cares if control is due to nature of buisness, regulatory requirements, and desire to ensure customer satisfaction

To be clear, the government began warning and selectively targeting employers years ago for misclassifying employees as independent contractors.  Consider this AI to be the final warning that the DOL will investigate the legitimacy of employers’ classification of workers as independent contractors.  And from its perspective there are very limited circumstances where a worker is a legitimately independent contractor.

A substantive audit and review of your classification of workers as independent contractors is highly recommended.  Please call if you have any questions.

Thompson Coe and myHRgenius Tip of the Week is not intended as a solicitation, does not constitute legal advice, and does not establish an attorney-client relationship.