So the Department of Labor is on a mission to extend the reach of the Fair Labor Standards Act.  Following on the heels of the proposed overtime regulations, in which the DOL is seeking to expand the number of workers eligible for overtime pay (and thereby increase their income – at least theoretically), the DOL has now issued an Administrator’s Interpretation in which it provides guidance to employers on how to determine whether a worker is an employee or an independent contractor for purposes of the FLSA.  Notably, the DOL states that, under its analysis, most workers are employees. (Well, that’s not surprising, coming from the DOL).

The DOL uses an economic realities test, and notes that this test is broader than the common law test, which focuses on the employer’s right of control over the worker. The economic realities test analyzes whether a worker is economically dependent on the employer, and is thus an employee, or is truly in business for himself as an independent contractor.

The FLSA defines employee as “any individual employed by an employer” and defines employ to mean “suffer or permit to work.” As described in the Administrator’s Interpretation, the following six factors are considered in determining whether a worker is economically dependent on the employer:

  1. “Is the work an integral part of the employer’s business?” If so, it is more likely that the worker is economically dependent on the employer. Work can be integral to a business even if it is just one component of the business, is performed by many others, or is performed away from the employer’s premises.
  2. “Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?” This factor does not focus on whether a worker can simply choose to work more hours, but on whether the worker exercises managerial skills that affects the opportunity for profit or loss beyond the current job (such as decisions to hire others, purchase materials and equipment, advertise, rent space, manage time tables, etc.)
  3. “How does the worker’s relative investment compare to the employer’s investment?” Under this factor, not only must the worker make some investment, but the worker’s investment must be compared to the employer’s investment. If the worker’s investment is relatively minor, that suggests the worker is economically dependent on the employer.
  4. “Does the work performed require special skill and initiative?” Under this factor, a worker’s business, not technical skills, are the focus. The DOL states that “Even specialized skills do not indicate that workers are in business for themselves, especially if those skills are technical and used to perform the work.”
  5. “Is the relationship between the worker and the employer permanent or indefinite?” If so, this suggests an employment relationship. The DOL notes, however, that the lack of permanence or indefiniteness does not automatically suggest an independent contractor relationship; the reason for the lack of permanence or indefiniteness must be reviewed to determine if it is due to “operational characteristics intrinsic to the industry” (such as the use of staffing agency workers) or the worker’s “own business initiative.”
  6. “What is the nature and degree of the employer’s control?” In order to support an independent contractor designation, the worker must actually – not theoretically – control meaningful aspects of the work being performed. An employer who determines a worker’s schedule, dress, or tasks is exercising control over the worker.

The DOL states that no one factor – particularly control – is determinative of whether a worker is an employee.  All the factors must be examined in a qualitative, not quantitative, manner in the broader context of economic dependence.

What does this mean for employers?  Well, your independent contractor relationships should be examined with a critical – and conservative – eye.  And realize that the worker may be deemed an independent contractor under some laws, but an employee under others!