U.S. Department of Labor Says Most Independent Contractors Are Misclassified Employees
August 7, 2015
U.S. Department of Labor Says
Most Independent Contractors Are Misclassified Employees
In Hargrove v. Sleepy’s (link to Sleepy’s post) the New Jersey Supreme Court recently reaffirmed the “ABC” test for determining who is an “independent contractor” under the New Jersey Wage Payment Law (WPL) and Wage and Hour Law (WHL). Examining several different tests, the Court examined and ultimately rejected the “economic realities” test used in the federal Fair Labor and Standards Act (FLSA) because it noted that the WPL and WHL differed from the FLSA in that an individual seeking protection in NJ under either the WPL or WHL is presumed to be an employee. Id. at *11.
Similarly, the U.S. Department of Labor (DOL) has now addressed the issue of “independent contractors” classification under the FLSA in an interpretative memorandum (insert link to memorandum) http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.pdf, which greatly expands the definition of an employee under that statute, and presumes, much like under the WPL and WHL, that under the economic realties test “in view of the expansive definition of ‘employ’ under the [FLSA], most workers are employees under the FLSA.” Id. at p. 2. Though this memorandum is not a statute or regulation, it is extremely important for employers to examine because courts often employ and rely upon an administrative agency’s interpretation of a statute that the agency is tasked with enforcing.
In the memorandum, the DOL applied the “economic realities” test to the “suffer and permit” portion of the statutory definition of employ under the FLSA. See 29 U.S.C. 203(g). The “economic realties” test includes several factors:
(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 control exercised or retained by the employer.
No one single factor, however, is determinative and a court must examine the totality of the circumstances when evaluating an employer’s designation of an “independent contractor.” According to the DOL, “The ultimate inquiry under the FLSA
is whether the worker is economically dependent on the employer or truly in business for him or herself. If the worker is economically dependent on the employer, then the worker is an employee.” Id. at p. 5. (emphasis added.) This language obviously is troubling for those employers who have independent contractors that perform work solely for the single employer.
The DOL provided numerous examples of how the courts have applied the various factors of the economic realties test. In determining whether the work performed is integral to the employer’s business, courts have found that those working in a call center for an employer, who is in the service business, to be performing work that was “integral to the employer’s business” and thus found them to be employees. Id. at p. 7. With respect to the permanency of the relationship factor, the DOL noted than an independent contractor, “typically works one project for an employer and does not necessarily work continuously or repeatedly for an employer.” Id. at 12. And in examining the nature and degree of control the employer has over the worker, the DOL cited a Third Circuit case that found homeworkers “largely insignificant” in determining their status because it held most homeworkers worked independently and set their own hours.
The memorandum is also significant because it indicates the agency’s intention to pursue enforcement actions of misclassification of independent contractors. Other states such as California, are also seeking to impose penalties through legislation for companies who misclassify workers as independent contractors. Additionally, as noted above, the New Jersey Supreme Court has recently expanded the classification for independent workers in the Hargrove case under the wage and hour laws by adopting the ABC test, which presumes that an individual is an employee, unless the employer can make certain showings regarding the individual’s employment. Though the “economic realities” test used by the DOL does not explicitly presume individuals to be employees like the ABC test applied to NJ wage and hour claims, now, independent contractors are much more likely to be classified as employees under the FLSA through the economic realities test.
In light of the foregoing developments, employers must closely re-examine their independent contractors. For assistance in evaluating your business’s independent contractor agreements, or if you have any questions about any other labor and employment matter, please contact any member of Trimboli & Prusinowksi, LLC at 973-660-1095 for assistance.