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What Employers Need to Know About the DOL Guidance re the [Mis]Classification of Employees as Independent Contractors Under the Fair Labor Standards Act

In July 2015, the U.S. Department of Labor (DOL), in response to considerable attention on the issue of misclassification of employees as independent contractors, announced that the Fair Labor Standards Act (FLSA) mandates an expansive definition of the term “employee.” In a blunt Administrative Interpretation, the DOL reiterated that the proper test for determining employee/independent contractor status under the FLSA is the “economic realities” test, and not the common law control test, which is the defining test under other employment statutes.

The economic realities test contemplates an analysis of six factors: (1) whether the work performed is an integral part of the employer’s business; (2) whether the worker’s managerial skills affect the worker’s opportunity for profit or loss; (3) how the worker’s relative investment compares to the employer’s investment in the work performed; (4) whether the work performed requires a special skill and initiative; (5) whether the relationship between the worker and employer is permanent or indefinite; and (6) the nature and degree of the employer’s control over the worker.

"[I]n sum, most workers are employees under the FLSA."

The DOL explained that this analysis is qualitative rather than quantitative, and that the econonic realities test should be liberally construed in favor of the broad purpose of providing coverage for workers. As a practical matter, what this means is “in sum, most workers are employees under the FLSA.”

The DOL went to great lengths to emphasize that the fundamental inquiry of the economic realities test -- insofar as the FLSA is concerned -- is whether “the worker is economically dependent on the employer” or truly in business for herself. The DOL explained that the issue of control needs to be examined in the broader context of whether the worker is economically dependent upon the employer. The DOL reasoned that in light of technical advances and enhanced monitoring mechanisms, it is increasingly possible for employees to work remotely or at least off-site, and that the worker’s control over the hours that she works is not necessarily indicative of independent contractors status. Specifically, a relatively flexible work schedule alone does not make an individual an independent contractor, rather than an employee.

Scenarios Illustrating Employer Control

The DOL emphasized that the control factor should not play an “oversized” role in an analysis of whether an individual is an employee or an independent contractor; instead, all of the relative factors should be considered. The issue, according to the DOL, is the nature and degree of the employer’s control, and not why the alleged employer exercised such control. The Department of Labor provided the example of a registered nurse in two possible scenarios to illustrate this point.

A registered nurse who provides skilled nursing care in nursing homes is listed with Beta Nurse Registry in order to be matched with clients. The registry interviewed the nurse prior to her joining the registry, and also required the nurse to undergo a multi-day training presented by Beta. Beta sends the nurse a listing each week with potential clients and requires the nurse to fill out a form with Beta prior to contacting any clients. Beta also requires that the nurse adhere to a certain wage range and the nurse cannot provide care during any weekend hours. The nurse must inform Beta if she is hired by a client and must contact Beta if she will miss scheduled work with any client. In this scenario, the degree of control exercised by the registry is indicative of an employment relationship.

Another registered nurse who provides skilled nursing care in nursing homes is listed with Jones Nurse Registry in order to be matched with clients. The registry sends the nurse a listing each week with potential clients. The nurse is free to call as many or as few potential clients as she wishes and to work for as many or as few as she wishes; the nurse also negotiates her own wage rate and schedule with the client. In this scenario, the degree of control exercised by the registry is not indicative of an employment relationship.

Employers Should Be Proactive in Classifiying Individuals

The Administrative Interpretation solidifies the DOL’s view that most individuals will be employees under the broad definitions set forth under the FLSA. As a result, it is incumbent upon employers to be proactive in their approach to properly classifying individuals. Specifically, employers should do the following:

  1. Regularly review job descriptions to make sure that they comport with the actual job duties being performed by individuals.
  2. Regularly monitor the number of hours that individuals are working to determine whether any are working overtime.
  3. Recognize that, despite the wishes of certain individuals to be treated as independent contractors, in most instances they will be deemed employees at least for purposes of the FLSA.
  4. Be mindful of the fact that an individual can be considered an employee for purposes of one employment statute, and an independent contractor for purposes of another.
  5. Review insurance policies to maximize insurance coverage in the event of an inadvertent misclassification.

Marc Engel is an employment and litigation attorney at Lerch, Early & Brewer in Bethesda, Maryland. For more information about classifying employees vs. independent contractors, contact Marc at (301) 657-0184 or mrengel@lerchearly.com.

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