DOL's Position on Worker Classification Remains Unchanged in Department's Newest Guidance

On July 15, 2015, the U.S. Department of Labor's Wage and Hour Division ("DOL") issued Administrator's Interpretation No. 2015-1, providing guidance to employers for determining whether workers are "employees" under the Fair Labor Standards Act ("FLSA"). Although the guidance is lengthy, it does little to alter the DOL's well-known position on worker classification. In a blog post accompanying the release of the guidance, Dr. David Weil, administrator of the Wage and Hour Division, underscored the DOL's intent to provide an informational resource for employers: "We believe in providing employers all the information that they need to comply, and this document, with its discussion of the relevant law and inclusion of numerous examples, will help employers."

Although the DOL continues to maintain an active enforcement agenda, in particular through its ongoing Misclassification Initiative, the positions expressed in its guidance do not represent a major sea change. In the DOL's view, the FLSA's definition of "employ" should be interpreted broadly. As the guidance reiterates, the DOL believes that many employers fail to heed or understand the scope of this definition, leading to frequent misclassification of workers.

None of this is new. Still, although the guidance is essentially a restatement of a relatively long-standing position, its publication alone has caused a stir. Companies may expect increased scrutiny and litigation as a result. This scrutiny and litigation will likely be focused on the individualized engagement of independent contractors by companies, particularly companies that engage workers who perform duties similar to a company's employees on a long-term basis.

It is unclear what prompted the DOL to issue this latest worker classification guidance. Only five such guidance letters have been published since 2010, and the previous four concerned far more discrete topics. Dr. Weil explained that the most recent guidance is part of the DOL's "robust education and outreach campaign." For employers that are unfamiliar with worker classification, the guidance does provide a useful summary of the DOL's position on what legal test should be used and how the factors of the test should be applied. In addition to contending that the definition of "employ" is broad and renders most workers "employees" under the FLSA, the DOL explains that it believes the ultimate inquiry is whether the worker is economically dependent on the employer (and thus an employee) or truly in business for himself or herself and economically independent from the employer (and thus an independent contractor).

The guidance also discusses the six-factor "economic realities" test that the U.S. Supreme Court developed long ago to consider when determining whether a worker is an employee:

• Whether the work is an integral part of the employer's business;
• Whether the worker's managerial skill affects his or her opportunity for profit or loss;
• How the worker's relative investment compares to the employer's investment;
• Whether the work performed requires special skill and initiative;
• Whether the relationship between the worker and the employer is indefinite; and
• The nature and degree of the employer's control over the worker.

In the DOL's view, applying the economic realities factors "is guided by the overarching principle that the FLSA should be liberally construed to provide broad coverage for workers." The guidance continues with a detailed discussion of each of the six factors, providing case citations and examples.

The guidance reminds employers that the actual working relationship between a worker and an employer, rather than the worker's title or an agreement between the parties, determines whether the worker is an employee. Moreover, each factor should be examined; no single factor is determinative. In other words, the outcome of the economic realities test "must be determined by a qualitative rather than a quantitative analysis." While it is true that courts generally apply all of the "economic realities" test factors in FLSA cases, the DOL's guidance fails to mention that some federal courts have placed particular weight on one part of the test—the nature and degree of the employer's control over the worker—an approach that the DOL's interpretation clearly rejects.

One noteworthy remark in the DOL's lengthy guidance is contained in a footnote. There, the DOL remarks that it has seen an increasing number of instances where employees were misclassified as something other than "independent contractors," such as "owners," "partners," and "members of limited liability companies." In light of the Equal Employment Opportunity Commission's ongoing investigations into several large partnerships, in which a central issue concerns whether partners should be considered employees for purposes of age discrimination lawsuits, this note appears significant. Still, even if the DOL plans to direct its classification efforts in this way, it is likely that most owners, partners, etc. would fall within an exemption to the FLSA.

Significance for Employers

While the guidance does little more than provide a detailed discussion of the economic realities test and reemphasize the DOL's well-known position that independent contractors are often misclassified, the guidance also serves as another reminder that worker misclassification remains high on the DOL's list of enforcement priorities.

At the same time, the guidance, as well as Dr. Weil's remarks on its publication, do not appear to signal a major policy shift within the DOL. Employers should remain vigilant in their classification efforts and carefully assess the "economic realities" of their relationships with independent contractors, but they should also recognize that the guidance represents more of the same, rather than something new, with respect to DOL worker classification enforcement efforts.

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Alan Colley, an associate in the Houston Office, assisted in the preparation of this Alert.

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