This year the United States Department of Labor announced its 2015 Misclassification Initiative aimed at combatting the misclassification of employees as independent contractors. While this has been a priority for the DOL for the last several years, they seem to be getting really, really serious of it lately. And for good reason- a June 2013 Treasury Inspector General for Tax Administration (TIGTA) report stated: “The misclassification of employees as independent contractors is a nationwide issue affecting millions of workers that continues to grow and contribute to the tax gap.” A 2009 TIGTA report on misclassification said the lost tax revenue from this misclassification is more than $1.6 billion dollars annually.
Today, about 50 million workers – one-third of the workforce – are classified as independent contractors, freelancers, or temporary workers. This number is predicted to grow to 60 million workers – 40 percent of the workforce – by 2020. These workers do not receive benefits and safeguards such as unemployment insurance, workers’ compensation, and retirement benefits.
On July 15 of this year, the DOL issued a memo setting out how the Fair Labor Standards Act (FLSA), the federal law governing minimum wage and overtime among other things, should be applied in making the determination if an employee is truly an “independent contractor” or would be considered an employee under the FLSA and entitled to the benefits it guarantees. And they could not have been more clear as to the expansive coverage of the FLSA.
The Department of Labor states “most workers are employees under the FLSA’s broad definition”.
According to the memo, independent contractors are individuals with economic independence, operating a business of their own. On the other hand, workers who are economically dependent on the company, regardless of skill level, are employees under the FLSA’s “very broad definitions.” The memo states the old definition based on the control the employer had over the employee no longer is controlling and courts should look at the “economic realities of the working relationship”.
In other words, a worker is entitled to minimum wage, overtime, and other provisions of the FLSA if, as a matter of economic reality, the worker is dependent on the entity. Is the worker economically dependent on the employer or truly in business for him or herself? This is the proper test to determine who is an employee under the FLSA.
The court listed six factors to look at when making this determination and gave examples of each:
Is the Work an Integral Part of the Employer’s Business?
For a construction company that frames residential homes, carpenters are integral to the employer’s business because the company is in business to frame homes, and carpentry is an integral part of providing that service.
Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
A worker provides cleaning services for corporate clients. The worker performs assignments only as determined by a cleaning company; he does not independently schedule assignments, solicit additional work from other clients, advertise his services, or endeavor to reduce costs. The worker regularly agrees to work additional hours at any time in order to earn more. In this scenario, the worker does not exercise managerial skill that affects his profit or loss. Even if the worker’s earnings fluctuate based on the work available and his willingness to work more- the lack of managerial duties is indicative of an employment relationship between the worker and the cleaning company.
How Does the Worker’s Relative Investment Compare to the Employer’s Investment?
A worker providing cleaning services for a cleaning company is issued a Form 1099-MISC each year and signs a contract stating that she is an independent contractor. The company provides insurance, a vehicle to use, and all equipment and supplies for the worker. The company invests in advertising and finding clients. The worker occasionally brings her own preferred cleaning supplies to certain jobs. In this scenario, the relative investment of the worker as compared to the employer’s investment is indicative of an employment relationship between the worker and the cleaning company. The worker’s investment in cleaning supplies does little to further a business beyond that particular job.
Does the Work Performed Require Special Skill and Initiative?
A highly skilled carpenter provides carpentry services for a construction firm; however, such skills are not exercised in an independent manner. For example, the carpenter does not make any independent judgments at the job site beyond the work that he is doing for that job; he does not determine the sequence of work, order additional materials, or think about bidding the next job, but rather is told what work to perform where. In this scenario, the carpenter, although highly- skilled technically, is not demonstrating the skill and initiative of an independent contractor (such as managerial and business skills). He is simply providing his skilled labor.
Is the Relationship between the Worker and the Employer Permanent or Indefinite?
An editor has worked for an established publishing house for several years. Her edits are completed in accordance with the publishing house’s specifications, using its software. She only edits books provided by the publishing house. This scenario indicates a permanence to the relationship between the editor and the publishing house that is indicative of an employment relationship.
What is the Nature and Degree of the Employer’s Control?
A registered nurse who provides skilled nursing care in nursing homes is listed with Beta Nurse Registry in order to be matched with clients. The registry interviewed the nurse prior to her joining the registry, and also required the nurse to undergo a multi-day training presented by Beta. Beta sends the nurse a listing each week with potential clients and requires the nurse to fill out a form with Beta prior to contacting any clients. Beta also requires that the nurse adhere to a certain wage range and the nurse cannot provide care during any weekend hours. The nurse must inform Beta if she is hired by a client and must contact Beta if she will miss scheduled work with any client. In this scenario, the degree of control exercised by the registry is indicative of an employment relationship.
The bottom line is: the issue as to whether a worker may be classified as an independent contractor needs to be looked at on a case by case basis.
You would probably be best served by consulting an attorney experienced in FLSA litigation as to what your rights may be under the act if you feel you have been improperly characterized as an independent contractor.
We have handled many of these cases successfully and would be glad to review your case for no charge. feel free to contact our Tennessee Employment Law Office and we will be glad to answer any questions you may have about your rights under the FLSA and other federal and state laws.