The Department of Labor, Wage and Hour Division, has issued new interpretative guidance regarding independent contractors. As I have mentioned before, many employers are trying to stretch the limits of independent contractors to include as many employees as possible. See my post here. This trend has been ongoing for a decade or more. The Administrator’s Interpretation No. 2015-1 can be found here. The guidance makes it clear that the old common law test will not apply to cases under the Fair Labor Standards Act. Courts applying the FLSA should apply the “economic realities” test. DOL adds in a footnote that while many cases involve alleged independent contractors, many other cases involve purported “partners,” “owners,” or members of a limited liability company. In such instances, the economic realities test will still apply. The economic realities test essentially asks whether the worker is economically dependent on the employer. The Guidance addresses each factor in detail:
- Is the work an integral part of the employer’s business? That is, if the employer is a grocery and it hires an electrician, then the electrician is likely to be found to be an independent contractor
- Does the worker’s managerial skill affect the worker’s opportunity for profit or loss? If the employer schedules the hours and work time for the worker, that indicates the worker depends on the employer for profit. But, if the work, such as a cleaning company, schedules its own workers based on its own needs, that suggests the worker is independent.
- How does the worker’s investment compare to the employer’s investment? Essentially, this factor addresses who provides the material and equipment for the work. For example in one case, farm workers provided their own gloves. That investment did not compare to the farm owner’s investment in tools and equipment.
- Does the work performed require special skills or expertise? Permanency or indefinite work assignment suggest the worker is an employee.
- What is the nature of the employer’s control of the work? If the employer merely assigns work goals or end products allowing the worker to determine how to create or effect that end product, then that lack of control indicates the worker is acting with some independence. Who decides the goal and who decides how to reach that goal?
These factors are not new. But, the Guidance does pull together the better caselaw on this critical test.