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Department of Labor Issues Guidance on the Classification of Employees vs. Independent Contractors

Due to recent clarifications by the U.S. Department of Labor (DOL), employees once characterized as independent contractors must now be designated as employees.

On July 15, 2015, the DOL’s Wage and Hour Division issued Administrator’s Interpretation No. 2015-1, which provides additional guidance for the classification of who is an employee under the Fair Labor Standards Act (FLSA). The DOL provided this interpretation in order to help control the widespread misclassification of individuals who are actually employees as independent contractors.

The classification of a worker as either an employee or independent contractor is important to a business owner for numerous reasons. For example, employers don't have to fund workers' compensation insurance, withhold taxes on wages, pay into social security or Medicare, or make other contributions on behalf of independent contractors as they are required to do for employees. Independent contractors are not subject to the FLSA’s minimum wage and overtime requirements. Finally, independent contractors aren't protected by employee-protection laws like OSHA or by anti-discrimination laws such as Title VII or the ADEA.

To determine whether an individual is an employee or independent contractor under the FLSA, courts apply the six-factor economic realities test. The six factors of the economic realities test are:
        (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 the 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.

The DOL’s recent interpretation concludes that most workers qualify as employees under the economic realities test.  In light of this guidance, employers who are improperly labeling workers as independent contractors could be exposed to significant liability.  Business owners may want to review or revise their employment agreements to ensure that workers are properly categorized as employees or independent contractors.  

To learn more about the designation of a worker as an employee versus an independent contractor, or for assistance with revising your employment forms or agreements, please contact the Business or Employment attorneys at Bozeman, Neighbour, Patton, & Noe, LLP.

September 30, 2015