Department of Labor Issues Interpretation Emphasizing Restrictive Approach to Independent Contractors

Several high profile cases have pushed the issue of worker classification – as either employees or independent contractors – to the fore recently, including cases involving Uber drivers in California, Fedex in multiple states, and Laclede Cab drivers here in St. Louis.  Department of Labor (DOL) Wage and Hour Administrator David Weil recently released an interpretation on this topic, in the form of a fifteen page Administrator’s Interpretation (“Memo”).  This guidance is not a new policy, it is just an interpretive Memorandum, but it certainly promotes a very restrictive view of who is an independent contractor.

The central theme of the Memo is to assert an extremely narrow classification of independent contractor and to refute anything more expansive.  That narrow classification is a response to the DOL’s stated concern that a large and growing number of employees are misclassified as independent contractors.  To that end, the Memo focuses on the Act’s definition of employment as “to suffer or permit to work,” and that the appropriate test for classification status is the “economic realities test.”  To distil the DOL’s position is to say that an independent contractor is “in business for him or herself,” while an employee is “economically dependent” upon the employer, a distinction that we will explore further later.

As employers have sought to address the needs of the modern business workplace, as well as to reduce certain employee costs, they have increased their usage of and reliance upon independent contractors.  To the DOL, this can be problematic because independent contractors do not enjoy the same protections as employees under the Fair Labor Standards Act.  The Department has therefore, been more aggressive in investigating what it deems to be misclassification of employees as independent contractors.  The preamble to the Memo discusses those ongoing efforts in some detail, and asserts that misclassification has been on the rise.

Employers have had their own concerns in this area and will see the Memo as more evidence of overreach.  The guidance certainly takes the most restrictive view of the independent contractor classification, which can conflict with business needs.  Many tasks call for the on-demand, sometimes temporary, skills of an independent contractor rather than a full-time employee.  And while the stated intent of the Memo was to “provide greater clarity,” some may feel that the tone is rather accusatory.

Ultimately, the Memo advances the “economic realities test” as the proper method for determining a worker’s classification.  This test uses several different factors, weighted heavily towards economic considerations to arrive at a determination.  Put simply, the test examines whether the individual in question is truly in a business endeavor of his or her own, or whether they are economically dependent upon the employer.  The Memo expressly targeted the so-called “control test” which was for many years considered to be the appropriate standard, and which focused on the amount of independent control the worker exercised over the work performed.  Under the economic realities test, control is just another factor to be considered rather than the primary concern.

This attempt to distinguish whether a worker is “in business from him or herself,” or is, instead, “economically dependent” upon the employer gives rise to perhaps the greatest flaw in the DOL’s analysis.  It fails to consider that even an individual entirely in business for him or herself can be wholly economically dependent upon one client and still not be an employee.  Of course in theory, the economic realities test might lead to that result.  That is to say some factor – such as control – might speak so strongly in a balancing analysis that it might overwhelm more numerous factors that point to the contrary result.  If that is true though, doesn’t it on some level raise the question of whether this interpretation really provides any greater “clarification” of the issue?

Many employer associations have spoken out against the interpretation advanced in the memo, saying that the economic realities test is too focused upon economic dependence and that it misses the true nature of the distinction between employees and independent contractors.  Labor unions, on the other hand, have spoken out in support of the interpretation.

The St. Louis employment attorneys at McMahon Berger have been representing employers across the country in labor and employment matters for nearly sixty years, and are available to discuss these issues and others.  As always, the foregoing is for informational purposes only and does not constitute legal advice regarding any particular situation as every situation must be evaluated on its own facts. The choice of a lawyer is an important decision and should not be based solely on advertisements.