9/30/2015
Employers May Be Targeted for Misclassifying Employees as Independent Contractors
Society of American Florists
The U.S. Department of Labor (DOL) has quickly followed its proposed rule to expand the number of workers eligible for overtime with a new interpretation of who can be classified as an independent contractor.
On July 16, the DOL Wage & Hour Division Administrator issued “Administrator’s Interpretation No. 2015-1” (AI) on the application of the Fair Labor Standards Act (FLSA) for identification of workers who are misclassified as independent contractors.
The AI states DOL’s unequivocal opinion that “most workers are employees.” The new interpretation could cause significant challenges for growers and others in the floral industry, leading to more private litigation, as well as increased DOL investigations and enforcement actions.
Simply put, the AI will sharply limit many businesses’ use of independent contractors, transforming these workers into W-2 employees covered by Social Security, Medicare, benefits, FMLA and other rights.
The AI states that DOL will rely on its view of a worker’s “economic independence” in determining whether they are an employee rather than an independent contractor. It proposes to look primarily at whether the worker is truly in business for him or herself or is economically dependent on the employer for which he or she provides services.
The AI also stresses that the control factor, which courts have traditionally used as a key test, shouldn’t be given undue weight. It unambiguously states that the agreements or titles used by employers and independent contractors are wholly “irrelevant” to the determination.
DOL identified six factors it would use in its analysis of a worker’s status:
1. The extent to which the work performed is an integral part of the employer’s business. According to the AI, this factor is central to the analysis. If the work is integral to the business of the employer, it’s more likely that the worker is economically dependent on the employer.
2. The worker’s opportunity for profit or loss depending on his or her managerial skill. The AI flatly rejects the ability to control one’s own hours as an indicator of such an opportunity, but looks instead to whether the worker exercises managerial skills, which require the use of judgment or initiative to affect the opportunity for profit or loss.
3. The extent of relative investments of the employer and the worker. The AI describes the investment of a real independent contractor as one that furthers the independent contractor’s capacity to expand or reduce its cost structure or extend the reach of the market for its business. It states that investing in tools and equipment doesn’t necessarily indicate that the worker is an independent contractor where the tools and equipment are only needed to do the work.
4. Whether the work performed requires special skills and initiative. The AI seems to reject this factor outright, emphasizing instead that a worker’s business skill, judgment and initiative will help determine if the worker is economically independent. Technical skills, in the view of the AI, are not indicative of any independence or business initiative.
5. The permanency of the relationship. The AI assumes that if an independent contractor wants more than one assignment from a company, then he or she must be rejecting independence. It describes this factor as a worker who typically works one project for an employer and doesn’t necessarily work continuously or repeatedly for that employer.
6. The degree of control exercised or retained by the employer. According to the AI, the worker must control meaningful aspects of the work to view the worker as conducting his or her own business. If the employer has control, the worker is an employee. Moreover, even where there’s no control, the FLSA covers workers who are economically dependent.
If workers who’ve been considered independent contractors are now classified as employees, many things change. These include compliance with the FLSA (record keeping, minimum wage and overtime), tax withholding, payroll taxes for Social Security/Medicare, unemployment compensation and workers’ compensation. Others include inclusion in group health insurance plans and ACA issues, ERISA-covered retirement plans, eligibility for FMLA, leave and other benefits, calculation of leave entitlement, eligibility for meal and rest breaks, reimbursement for business expenses, immigration compliance, plus statutes such as Title VII, ADEA, the ADA, other anti-discrimination laws, and a host of state and local laws that traditionally do not cover independent contractors.
One significant issue that will require ongoing analysis is that, even if employers change their use of independent contractors, the risk of various liabilities from prior practices still remains.
With the AI, DOL has created a great deal of uncertainty. Business owners need to start looking at how they make decisions regarding classification of current non-employee workers.
Some of the factors that you should consider in assessing the independent contractor issue are:
- How you currently use independent contractors
- How independent contractors manage their businesses and the extent to which an independent contractor is running a business
- Whether you can defend your past independent contractor classifications
- Whether you can defend your retention of these classifications after the AI was issued
- The cost of converting independent contractors to employees versus the risk of keeping them classified as independent contractors
An issue brief developed by the law firm of Sheppard, Mullin, Richter & Hampton LLP can be found here:
www.laboremploymentlawblog.com/2015/07/articles/independent-contractors/dol-says-most-independent-contractors-actually-employees/ and an article published by the Society of Resource Management (SHRM) can be found here:
www.shrm.org/legalissues/federalresources/pages/administrator-interpretation-independent-contractors.aspx.
For business owners concerned that some in their workforce will now be deemed employees, the safest course of action is to work with legal counsel to determine the proper course of action.
GT
“SAF in the Lobby” is produced by the Society of American Florists, 1601 Duke Street, Alexandria, Virginia 22314; Tel: (703) 836-8700 or (800) 336-4743; Fax: (703) 836-8705; or visit the SAF Web site: www.safnow.org. For more information on legislative issues, contact the Government Relations Department.