Department of Labor Says Most Contractors Are Actually Employees

A recent move by the U.S. Department of Labor (DOL) could have far-reaching implications for businesses that hire contractors. Traditionally, such workers were not considered employees under the Fair Labor Standards Act (FLSA) and therefore not entitled to Social Security, Medicare, the Family and Medical Leave Act or health care under the Affordable Care Act. Now the Administration’s initiative to broaden the definition of “employee” is getting some support from the U.S. Supreme Court.

Background

In the past, a control test used to determine when a worker is an employee looked at whether the employer had the right to tell the worker what to do, how to do it and when and where to do it. In recent court rulings, however, courts have begun to broaden the definition of “employ” to a wider set of employers and employees. In July, the DOL’s Wage and Hour Division (WHD) issued Administrative Interpretation No. 2015-1 (AI) stating that the FLSA should be liberally construed to provide broad coverage for workers under an “economic realities” test.

Economic Realities

Expanding upon the control test, the U.S. courts have developed an “economic realities” test to determine whether or not a worker is an employee or an independent contractor under the FSLA by examining many aspects of the relationship, including: 

1. The degree to which control is exercised or retained by the employer
2. The worker’s opportunities for profit or loss
3. The relative investments of the employer and worker
4. The permanency and length of the relationship between the business and the individual
5. The degree of skill needed to do the work
6. The degree to which the work performed by the individual is an integral part of the employer’s business

Even with this broader definition, the test of an employer-employee relationship would seem to rest on issues relating to control of the work performance. The Department of Labor is not too quick to agree.  In its 15-page AI, the WHD addresses each of the six factors listed above by effectively narrowing their interpretation, thus weakening the economic realities test. The AI emphasizes just how broad the definition of employee is under the FLSA, concluding that “most workers are employees under the FLSA’s broad definitions.” 

SCOTUS Uses DOL Interpretation to Rule in Favor of…DOL

The 15-page AI is non-binding and will not lead to changes in regulations. However, it’s already gaining momentum. In a recent Supreme Court decision (Perez v. Mortgage Bankers Association), the High Court gave the DOL’s initiative the green light by referring to the AI to rule in favor of the DOL. This makes it rather clear that the courts will, to some extent, defer to the AI in future employee-contractor classification cases. The message to employers is clear—as stated in the AI, the DOL intends to convert most contractors to employees.

As stated by the Small Business Council of America, “The new AI, which states that most workers qualify as employees under the FSLA, could cause significant misclassification problems for businesses, leading to more DOL investigations and enforcements actions and increased litigation.”

Do you have questions about Department of Labor standards? Or, are you looking for more information on our tax compliance and preparation services? Contact Smith and Howard at 404-874-6244 or fill out our form below for more information.