Earlier this year I posted regarding an expanding collaboration between various state and federal agencies to combat misclassification of employees as independent contractors. This effort is being spearheaded by the US Department of Labor, which reports receiving numerous complaints of misclassification for the purposes of avoiding minimum wage and overtime compensation requirements, unemployment insurance and workers compensation coverage. Very recently, the Department of Labor’s Wage and Hour Division Administrator issued an “Administrator’s Interpretation” providing guidance on the factors to be analyzed when determining whether a worker should be classified as an employee or independent contractor for purposes of federal minimum wage and overtime laws and the Family and Medical Leave Act (FMLA).
An interpretation document does not create new legal requirements or change old ones. It does, however, provide employers and their legal counsel insight into the Department of Labor’s enforcement priorities and how the Department intends to interpret current legal requirements. The message to be taken from this latest announcement is clear. The Department believes many employers have abused the independent contractor classification and it will focus enforcement efforts toward rectifying that abuse.
One important point raised in this interpretation is that the legal test used by federal courts to determine whether a worker is an employee or independent contractor (for purposes of federal wage and hour laws and the FMLA) differs from the test used by many states, including Tennessee. Yes, that means some of your workers may meet the state law test to qualify as independent contractors and thereby not qualify for workers compensation and unemployment insurance benefits, but still be regarded as employees under the more strict federal law standard.
Most state law standards used to differentiate between employees and independent contractors tend to focus primarily on the employer’s “right of control” over the worker’s daily activities. Of course, when one factor is accentuated in an analysis, it can be manipulated. The standard employed by federal courts for wage and hour purposes is different. Instead of focusing on the right to control a worker’s hours and method of work, federal courts apply what is called the “economic realities” test. This seeks to determine if the worker is “economically dependent” on the employer (and thus an employee), or truly “in business for him or herself.”
The Department’s interpretive guidance lists a number of considerations it will analyze in future enforcement actions. For instance:
• If work performed by a worker is integral to the employer’s business, he is more likely “economically dependent” on the employer and thus an employee (i.e., a cake decorator at a bakery). A true independent contractor’s work more often than not is peripheral to the primary business of the employer (i.e., a plumber installing a wash sink at the bakery).
• Does the worker have the opportunity to exercise managerial skills that provide not only the ability to make a profit, but also to sustain a financial loss? People truly in business for themselves can make bad business decisions that lead to financial loss.
• True independent contractors, who are in business for themselves, make significant investments in their business that last beyond any one particular job and business client. According to the Department of Labor, this investment requirement involves more than buying a few tools needed to work at a single location.
• True independent contractors tend to work for multiple customers/clients and not on a permanent or indefinite basis for a single employer.
Government agencies at both federal and state levels are gearing up to challenge employers who use independent contractor labor in positions where the workers look and act more like employees. The cost of misclassification to employers can be substantial in terms of back payroll taxes, fines and penalties. Given the Department of Labor’s clear indication of a serious enforcement effort in this area, any employer using workers classified as contractors at this point should consider having an audit of those classifications undertaken in the near future.
John M. Lawhorn of Frantz, McConnell & Seymour, LLP practices extensively in the field of Labor and Employment law and regularly advises clients concerning federal and state laws pertaining to employment discrimination, retaliation and harassment, workplace policies, OSHA/TOSHA compliance, wage and hour compliance, labor/management relations, employment contracts and in many other aspects of the employment field. He regularly represents employer and employee interests in Tennessee State and federal courts on a wide variety of employment related matters.