Legal Alerts

16 Jul 2015

The Department of Labor Shatters the American Dream

For many, owning your own business and being your own boss is the American Dream.  A new publication issued by the Department of Labor (DOL) may well turn this dream into a nightmare. By issuing Administrator’s Interpretation No. 2015-1 (the Interpretation), the DOL signaled its intention to construe very broadly the phrase “suffer or permit to work” −the historical definition of “employ” in the Fair Labor Standards Act (FLSA). The practical effect of this interpretation will be to deprive many individuals of the freedom to be self-employed.  The concomitant increase in labor costs for many businesses is not just alarming; it represents a real threat to the nation’s economic recovery.

The DOL’s agenda was made crystal clear in the Interpretation by its repeated admonition that, “most workers are employees.” Employers subjected to an audit by the DOL can expect to have all independent contractor relationships closely scrutinized.  The DOL’s stated intention is to determine whether the putative independent contractor is really in business for him/her self or is “economically dependent on the employer.” The DOL intends to apply a six- part test to decide the propriety of treating a worker as an independent contractor.  The six factors include: 

  1. The extent to which the work performed is an integral part of the employer’s business.
  2. The worker’s opportunity for profit or loss depending on his/her managerial skill.
  3. The extent of the worker and employer’s relative investments.
  4. Whether the work performed requires special skills and initiative.
  5. The permanency of the relationship.
  6. The degree of control exercised by the employer.

In response to the reliance by many courts on the “degree of control” factor, the Interpretation emphasizes that no one factor, including particularly the “degree of control,” will be determinative. The factors themselves are not novel; they represent a rather conventional formulation of the test for independent contractor status. However, the manner by which the DOL intends to apply these tests is both novel and concerning. 

The first factor which examines the degree of integration of the putative contractor’s work with the employer’s overall operations has historically been given minimal attention. The Interpretation elevates this factor to prominent status. The impact of this change in emphasis is significant. Presumably, only work that the DOL considers tangential to the employer’s primary operation will be considered an appropriate outlet for utilizing the services of independent contractors. 

The DOL reinterpreted the second factor which focuses on the opportunity for profit or loss as a test of the worker’s managerial acuity. As reformulated by the DOL, the focus of this factor is not on whether the worker can earn more money by accepting more jobs, working longer hours, or working harder for the employer. Instead, the focus is on whether the worker is subject to experiencing losses as well as profits. It also focuses on whether the worker’s ability to make decisions regarding hiring others to perform the work; purchasing materials and equipment; advertising; renting space; and managing timetables will affect his/her opportunity for profit. This shift in focus militates strongly against finding an individual entrepreneur to be an independent contractor in contrast to an established multi-employee outside company. 

The DOL reinterpreted the third factor, which measures the parties’ respective capital investments, as an exercise in comparative mathematics. The worker’s investments in tools and equipment alone, even if substantial, will not evidence independent contractor status. The Interpretation explains the DOL’s intention to compare the degree of the worker’s investment with that of the employer. If the employer’s investment is proportionally vastly larger than the worker’s contribution, the DOL will weigh this factor as averse to a finding of independent contractor status. 

The fourth factor, examining the degree of special skill and initiative required to perform the work, is relegated by the DOL to minor status. Moreover, the Interpretation shifted the focus of this factor from skill to initiative. In the DOL’s view, many workers have “special skills” such as carpentry or electrical expertise that is also shared by workers treated as employees. The DOL intends to focus not on the skill itself, but rather on the use of the skill to further the worker’s business objectives. Similarly, the DOL deemphasized the permanency or indefiniteness of the relationship as a factor. Even though lack of permanence in the employer/contractor relationship is an indicator of independent contractor status (because it evidences the contractor’s desire to avoid dependence on the employer), the worker’s own business initiative can transform even a permanent relationship into indicia of independent contractor status. 

Finally, the Interpretation severely restricts an employer’s reliance on the absence of their right to control the work of the putative contractor. The DOL preserved this factor as a component of the test, but explained that a worker’s control over his/her own hours alone is not a significant form of freedom from control. Additionally, control exercised by the employer that is necessitated by regulatory requirements or the nature of the business will still be regarded as an indicia of “employee” status. Again, the DOL’s focus will be on whether the control exercised by the employer demonstrates that the worker is really economically dependent on the employer. 

This new Interpretation affects every employer utilizing the services of independent contractors. The potential adverse consequences of misclassification can be severe.  An employer confronted with an adverse DOL decision may be liable for payroll taxes, overtime payments, and other taxes and back benefits for a period of two or more years. We strongly recommend that employers contact one of our attorneys to discuss an appropriate mechanism for reviewing these independent contractor relationships for existing and future workers. 

If you have any questions about the DOL’s Interpretation or any other employment matter, please contact the attorneys at The Lowenbaum Partnership.

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