Aug 5, 2015

By David Warner

With relatively little fanfare, less than a month ago the U.S. Department of Labor (“DOL”) issued an Administrator’s Interpretation concerning the application of the Fair Labor Standards Act’s “suffer or permit to work” standard in identifying employees misclassified as independent contractors . Some commentators have suggested that the guidance was a manifestation of regulatory unease with the transitory workforce of the exploding “gig” or “on-demand” economy.  While that may be the case, and last week’s DOL blog post appears to support such a conclusion , the reach of the Interpretation is not limited in application, and the tightening of the independent contractor analysis could have significant impact on government contractors, an industry sector known for its frequent use of independent contractors.

The principal takeaway from the Interpretation is the DOL’s de-emphasis of the question of how much control is exercised over a worker and a significantly increased focus on the “economic realities” test, which examines whether a worker is truly in business for him- or herself or whether they are effectively dependent on the employer. In conducting an economic realities test, the DOL noted six factors:

  • 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 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.
  • The degree of control exercised or retained by the employer.

The agency expressly stated that “no single factor is determinative” and that the “‘control’ factor … should not be given undue weight.”

Most troubling for the government contracting community would be the first three factors. Independent contractors are routinely integrated within the employer’s larger business, often working side-by-side with W-2 employees. Similarly, given hourly billing typical on many contracts, payments to independent contractors are often structured as hourly payments, providing virtually no opportunity for “loss depending on … managerial skill.” Finally, the relative investments of the employer and the worker in question tend to be wildly out of proportion, particularly with individual 1099 contractors.

The risks for employers with misclassified workers are manifold. For example, in addition to unpaid payroll taxes and contributions for unemployment insurance, employers may be faced with claims for unpaid overtime and unpaid benefits (i.e., health insurance as well as 401k/retirement contributions). With the DOL signaling a more restrictive definition, contractors are well counseled to review their current independent contractor relationships to ensure that they can withstand scrutiny.

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