The Department of Labor Clarifies the “Independent Contractor” Test

August 18, 2015

The U.S. Department of Labor (DOL) has been active in bringing enforcement actions against employers that misclassify workers as “independent contractors” rather than “employees.” Employers sometimes classify workers this way to avoid having to comply with wage, hour, and benefit laws. Often this misclassification is not intentional, but rather a result of employers misinterpreting the laws on how the classification is supposed to be made.

Because different state and federal agencies each have their own tests to define an independent contractor, employers are further confused by the fact that a worker can be an employee under one agency, but an independent contractor under another. To help employers make the proper classification for purposes of the Fair Labor Standards Act (FLSA), the DOL released its interpretation of the federal cases that have ruled on the matter.

The DOL takes a very broad approach to defining an “employee” under the FLSA. While agencies such as the Internal Revenue Service focus on the level of control that an employer has over a worker, the DOL uses an “economic realities test,” which makes it more difficult to find an individual to be an independent contractor.

To “employ,” under the FLSA, broadly means “to suffer or permit to work.” The DOL believes this definition to be so broad that it only excludes workers that are truly independent businesses, rather than economically dependent on an employer. Countless court decisions have contributed to further defining whether a worker is economically dependent. The DOL used these decisions to create a six-factor balancing test. Employers must weigh each of these factors to determine if a worker is an employee under the FLSA:

  1. Whether the work is integral to the employer’s business. An individual is more likely to be an employee when the work he or she performs is integral to the business. A carpenter, for example, performs work integral to a construction company that builds frames for houses. A software engineer that develops the company’s accounting software would not be performing work integral to the construction company’s business.
  1. The effect of the worker’s managerial skill on his opportunity for profit or loss. Independent contractors that are truly not economically dependent on an employer face the risk that their work could generate either profit or loss. Whether the worker profits should depend on his or her managerial decisions, such as hiring competent employees, purchasing adequate materials or tools, and marketing to the right clients. Where the workload, materials, and clients ultimately source from an employer, and give the worker little flexibility, the worker is more likely to be an employee under the FLSA.
  1. The worker’s investment compared to the employer’s investment. Consistent with an independent contractor’s risk of profit or loss, the contractor can only risk loss if he or she has made personal investments. The more that an employer invests into an enterprise relative to the worker’s investment, the less the worker’s risk of loss, and the more likely he or she is an employee.
  1. The special skills or initiatives required for the work performed. While technical skills, like those of an electrician or carpenter, are not necessarily indicative one way or the other of an employment relationship, skills that allow the worker to make decisions independent of the employer creates more of an independent contractor status. A carpenter, for example, is more likely to be an employee when working for a frame construction company than a carpenter who makes hand-crafted signature cabinets for a furniture company. The hand-crafting carpenter has the freedom to customize his work in a way that the construction carpenter would not.
  1. Whether the relationship with the employer is permanent or temporary. Although independent contractors tend to have temporary and relatively short relationships with an employer, the reasoning behind the length of the relationship must also be considered. Some independent contractors necessarily are engaged by an employer for long terms and some employees necessarily hold a temporary position.
  1. The nature and degree of the employer’s control. Often employees are more directly supervised by employers than independent contractors are, and their work is more strictly managed. This factor must also be taken in the context of the job, however, as the nature of some contract jobs require more control, and some employers have very lax control over employees who work at home. The agency warns that employers should not overemphasize the “control” factor, which is often determinative in other legal tests.

The DOL stresses that no single factor can determine whether or not an employment relationship exists under the FLSA. The factors must be weighed against each other and take into consideration the nature of the job.

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