Hunton Employment & Labor Perspectives

On July 15, 2015, the Department of Labor (“DOL”) issued guidance which it claims is designed to reduce the misclassification of employees as independent contractors under the Fair Labor Standards Act (“FLSA”). This guidance boldly claims that “most workers are employees under the FLSA’s broad definitions.” Based on this guidance, the DOL will likely aggressively argue that workers are employees subject to the FLSA – not independent contractors.

Under the FLSA, workers are considered employees if they are “economically dependent on the business of the employer, regardless of skill level.” In order to make this determination, courts traditionally consider six “economic realities factors.” According to the guidance, the six economic realities factors are:

• The extent to which the work performed is an integral part of the employer’s business;
• Whether the worker’s managerial skills affect his or her opportunity for profit and loss;
• The worker’s investment when compared to the employer’s investment;
• The worker’s business skill, judgment, and initiative;
• The permanency or indefiniteness of the worker’s relationship with the employer; and
• The nature and degree of the employer’s control over the worker.

The guidance explains that there is no mechanical way to apply these factors and that no one factor should control the classification analysis. However, the guidance makes clear that these factors should be applied in light of the FLSA’s expansive definition of employment as “to suffer or permit to work.” Given a previous DOL study, which estimated that at least 30% of employers misclassify workers as independent contractors, this guidance’s focus on expanded coverage may encourage a large number of independent contractors to argue that they are really employees under the FLSA.

Taken alongside the DOL’s recent proposed rule seeking to dramatically expand overtime eligibility, this guidance further reflects the DOL’s clear intention to increase the number of employees receiving overtime under the FLSA. While courts are not obligated to adhere to this interpretive guidance, they may do so. As a result, we suggest that employers continue to track this DOL initiative and monitor courts’ reactions. In addition, we suggest that employers review their own employee classification system in light of the DOL’s push towards expansive FLSA coverage.