Classification of workers as independent contractors v. employees has become an important focus of the US Department of Labor in recent years. Misclassification of employees as an independent contractor is commonplace, and can subject an employee to significant financial penalties and costs. For that reason it is in the interest of every business owner to ensure that employees are properly classified.
The reason that the Department of Labor is so concerned about the matter is that misclassification means that independent contractors who are really employees do not receive certain workplace protections, such as the minimum wage, overtime compensation, unemployment insurance, and workers’ compensation.
The Fair Labor Standards Act establishes the scope of the employment relationship under the Act and provides a basis for distinguishing between employees and independent contractors. An “employee” under the FLSA is “any individual employed by an employer.” 29 U.S.C. 203(e)(1). An “employer” is “any person acting directly or indirectly in the interest of an employer in relation to an employee.” 29 U.S.C. 203(d). The definition of “employ” includes “to suffer or permit to work.” 29 U.S.C. 203(g). The suffer and permit concept have been interpreted broadly.
The U.S. Supreme Court has developed a multi-factor “economic realities” test to determine if a worker is an employee or an independent contractor under the FLSA. Tony & Susan Alamo Found. v. Sec’y of Labor, 471 U.S. 290, 301 (1985); Goldberg v. Whitaker House Co-op, Inc., 366 U.S. 28, 33 (1961). The factors to consider include the following: (1) the extent to which the work performed is an integral part of the employer’s business; (2) the worker’s opportunity for profit or loss depending on his or her managerial skill; (3) the extent of the relative investments of the employer and worker; (4) whether the work performed requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer. Id. No one single factor is determinative; all factors should be considered in totality, and the factors should not be applied as a checklist. Id. The label an employer gives the relationship is not determinative; therefore, an agreement between an employer and a worker labeling the worker as an independent contractor is not indicative of the economic realities of the work relationship and is not relevant to the analysis of a worker’s status. See, e.g., Scantland v. Jeffry Knight, Inc., 721 F.3d 1308, 1311 (11th Cir 2013); Brock v. Superior Care, Inc., 840 F.2d 1054, 1059 (2nd Cir. 1988); Robicheaux v. Radcliff Material, Inc., 697 F.2d 662, 667 (5th Cir. 1983).
Applying these factors to a given business can be complex, and the costs of an incorrect conclusion and classification can be hugely expensive. The political aspect of employee classification in recent years only adds to the complexity. For those reasons, every business owner who is considering classifying workers as independent contractors is well advised to consult with their attorney.