Yesterday, the Department of Labor clarified the standards it uses to determine if a worker is an employee or an independent contractor under the Fair Labor Standards Act (“FLSA”). In short, it emphasized that “most workers are employees under the FLSA,” even when classified as independent contractors, partners or members of external LLCs in their contracts.
The DOL uses a test it calls the “Economic Realities Factors” to determine if the worker is an employee or operating an independent business. The test is designed to determine if the worker is “economically dependent” on the employer, under the theory that true independent contractors are not economically dependent on any single employer the way an employee is. These factors include:
#1 Is the work performed by the Worker an integral part of the Employer’s business?
#2 Does the Worker’s business-managerial skill or initiative affect the Worker’s opportunity for profit or loss?
#3 How does the Worker’s relative investment in the business compare to the Employer’s?
#4 Does the work require special skill and initiative?
#5 Is the relationship between the Worker and the Employer permanent or indefinite?
#6 What is the nature and degree of the Employer’s control?
No single factor is entirely determinative and all factors should be considered together to determine if a worker is economically dependent on the employer or in business for him or herself.
The use of independent contractors has been closely scrutinized by the DOL for the past several years. The issuance of the Interpretation should be viewed by employers as a strong warning that the DOL will continue to be vigilant in challenging independent contractor status. Therefore, if you use independent contractors or are planning to use independent contractors, we encourage you to review the Interpretation and seek guidance to clarify any questions you may have about proper classification of your workers.
As always, let us know if we can help or if you have any questions.