Employee or Independent Contractor: A Question of Economic Dependence
Fed Ex. Uber. DirectTV. These companies, and others across the country, are being confronted with challenges to the classification of their independent contractors. A 2005 study by the US Bureau of Labor Statistics estimated that more than 10.3 million workers in the United States, which is 7.4% of the workforce, are treated by businesses as independent contractors. Studies show that thirty percent (30%) of businesses misclassify employees as independent contractors.
The United States Department of Labor (DOL) and Internal Revenue Service (IRS), as well as many state workforce agencies, have each taken a proactive role in identifying, investigating and prosecuting companies for misclassification of independent contractors under the federal Fair Labor Standards Act (FLSA). Independent contractor misclassification has also become an issue raised in the current United States presidential race.
Most recently, on July 15, 2015, the DOL published its Administrator’s Interpretation No. 2015-1, which specifically addresses the six-factor standard applied by the DOL and courts in identifying employees who are misclassified as independent contractors. While the same six factors are used in the analysis, the Interpretation places a greater emphasis on the worker’s “economic dependence” on the business that has engaged his or her services. The Interpretation confirms that under an analysis by the DOL, most workers will be deemed employees.
Specifically, the Administrator’s Interpretation confirms that the application of the economic realities analysis applied by the DOL and the courts should be guided by the FLSA’s statutory directive that the scope of the employment relationship is very broad. The Interpretation emphasizes that this test “focuses on whether the worker is economically dependent on the employer or is in business for him or herself.” The Interpretation concludes that a “worker who is economically dependent on an employer” would be designated as an employee. The Interpretation goes on to state that the goal of the analysis is to determine “whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor).”
The legal and economic implications of independent contractor misclassification are significant. The risks include liability for unpaid payroll and unemployment taxes, overtime, minimum wages, employee expenses and other employee payments and benefits. These risks can be minimized by businesses by reevaluating and either (re-)documenting their independent contractor relationships or reclassifying their workers from independent contractors to employees.
Given the ongoing and recently renewed focus of the DOL, as well as the IRS and state workforce agencies, on this issue, now is the time for businesses to analyze their workforce and to take steps to ensure their relationships with their workers comply with governing laws.