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On July 15, 2015, The United States Department of Labor’s Wage and Hour Division released an Administrator’s Interpretation, which broadly defines an “employee” under the Fair Labor Standards Act (“FLSA”) so that most workers would be classified as employees, not independent contractors.  The Administrator’s Interpretation applies an “economic realities” test to the FLSA’s broad “suffer or permit” employment standard to conclude that an employer “suffers or permits” an employee to work if that individual is dependent on the entity as a matter of economic reality.

The economic realities test examines six factors to determine whether a worker is an independent contractor: (1) whether the work is an integral part of the employer’s business; (2) whether the worker’s managerial skill affects profits; (3) the investment of the worker; (4) whether the worker’s job requires special skills; (5) the permanence of the worker’s relationship with his employer; and, (6) the degree of the employer’s control over the worker.  One of the more significant changes to the economic realities test is that a comparative analysis is now required to analyze the worker’s investment versus the employer’s investment in the enterprise.  Additionally, a worker’s independence is no longer conclusively proven by the ability to flexibly schedule their work.  The full text of the Wage and Hour Division’s Administrative Interpretation, which includes a thorough discussion of all six factors, can be found here.

Obviously, employee status under the FLSA triggers employer obligations, including payment of overtime.  Both the DOL and plaintiffs’ lawyers aggressively pursue employee misclassifications.  Even though the Administrator’s Interpretation is not binding on courts, they likely will defer to it.   As a result, employers should reexamine their current relationships with independent contractors to determine if workers are properly classified under this Administrator’s Interpretation.  Any semblance of a permanent or indefinite relationship with an independent contractor should be avoided, and the terms of the relationship or the specific project should be spelled out in the agreement.  Moreover, companies should refrain from giving independent contractors rights and access that militate against their status as independent contractors. 

The foregoing is for informational purposes only and does not constitute legal advice regarding any particular situation and should not be relied on as such.  Please contact one of our labor and employment lawyers if you have any questions.

This update was prepared by Charles S. Elbert and Kevin A. Sullivan.