There are a number of different ways for employers to determine whether an individual is a full-time employee or an independent contractor (IC), but is there one single method all companies should be using? In recent guidance, the DOL answered that question with a resounding “yes.”
The DOL issued a 15-page Administrator’s Interpretation, which was written by DOL administrator David Weil, on how employers should distinguish between employees and contractors and classify accordingly.
Economically dependent or not?
Simply put: Employers should always use the DOL’s “economic realities” test to determine a worker’s classification. This test is designed to determine whether:
- an employee is economically dependent on the employer, which would make him/her an employee, or
- the person is in business for himself or herself, which makes him/her an IC.
The economic realities test includes the following six factors that employers can use on a case-by-case basis to pinpoint the correct way to classify an individual:
- the extent to which the work performed is an integral part of the employer’s business
- the worker’s opportunity for profit or loss depending on his or her managerial skill
- the extent of the relative investments of the employer and the worker
- whether the work performed requires special skills and initiative
- the permanency of the relationship, and
- the degree of control exercised or retained by the employer.
‘Most workers are employees’
The DOL’s guidance comes right on the heels of a controversial ruling about worker classification made by California’s Labor Commission. Just last month, the Commission caused quite a stir among employers everywhere when it said that Uber drivers were actually employees and not ICs.
Now it seems like the DOL feels the need to weigh in on the contractor issue.
One major takeaway for employers on the contractor issue is the DOL’s statement that “most workers are employees.” Weil elaborated on this by stating:
In sum, most workers are employees under the FLSA’s broad definitions. The very broad definition of employment under the FLSA as “to suffer or permit to work” and the Act’s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor. The factors should not be analyzed mechanically or in a vacuum, and no single factor, including control, should be over-emphasized. Instead, each factor should be considered in light of the ultimate determination of whether the worker is really in business for him or herself (and thus is an independent contractor) or is economically dependent on the employer (and thus is its employee).
In short, the guidance serves as an important reminder to employers everywhere — through statements about how most employees are contractors — about just how important it is to be absolutely certain ICs are classified correctly and reminds them the economic realities test is the best way to make that determination.