Independent Contractor or Employee: Do You Pass the “Economic Realities” Test?

In the first Administrator’s Interpretation issued in more than a year, the Department of Labor has recently weighed in on the debate over the misclassification of employees—a  debate that has been stirred up of late by companies such as Uber, Lyft, and the now closed Homejoy.

“Although independent contracting relationships can be advantageous for workers and businesses, some employees may be intentionally misclassified as a means to cut costs and avoid compliance with labor laws,” wrote David Weil, administrator of DOL’s Wage and Hour Division.

Workers classified as employees are entitled to FLSA protections, which would include minimum wage and overtime compensation as well as unemployment insurance, and workers’ compensation. Independent contractors on the other hand do not receive such protections.

Consistent with Congress’s intent that the FLSA be interpreted broadly to classify workers as employees, the DOL has articulated a six-part “economic realities” test in favor of liberal employee classification:

  1. Is the work performed an integral part of the employer’s business: if integral, then indicative of an employee.
  2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss: if a worker exercises managerial skill that affects her profit and loss, then indicative of an independent contractor.
  3. How does the worker’s relative investment compare to the employer’s investment: if the worker’s investment is relatively minor (e.g., supplies), that suggests that the worker and the employer are not on similar footings and that the worker may be economically dependent on her employer – and thus an employee.
  4. Does the work performed require special skill and initiative: a worker’s business skills, judgment, and initiative, not her technical skills, will aid in determining whether the worker is economically independent.
  5. Is the relationship permanent or indefinite: permanence or indefiniteness are indicative of an employee as compared to an independent contractor, who typically works one project for an employer and does not necessarily work continuously or repeatedly for an employer.
  6. What is the nature and degree of the employer’s control: an independent contractor must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting her own business.

Notice that this new test does not establish any bright line rules. According to the DOL, the goal is not simply to tally which of these six factors are met in any given situation, but to determine, after much litigation presumably, whether the worker is economically dependent on the employer (and thus an employee) or is really in business for herself (and thus an independent contractor).

One thing is certain: independent contractor agreements may not protect you from liability. This new guidance from the DOL should invite greater care in your classification of workers and encourage a review of the nature and scope of work being performed in your business.

If you are an employer who has questions about the application of the DOL’s “economic realities” test to your business, attorneys with the Sands Anderson Employment Practice Group are available to answer your questions and assist you with issues concerning this important issue.