Department of Labor Says Most Workers Are Employees Under FLSA: Ultimate Test is Economic Dependence

The DOL’s test has as its foundation the FLSA’s broad definition of “employ” as “to suffer or permit to work.” The Administrator’s Interpretation relies on a 1985 Supreme Court case, Tony & Susan Alamo Found. v. Sec’y of Labor, which articulated an “economic realities” test for employment under the FLSA. Although that case dealt with putative volunteers rather than independent contractors, the Administrator’s Interpretation identifies the issue of a worker’s economic dependence as the most important factor in distinguishing between independent contractors and employees. In rejecting the “common law control test” for independent contractors, the Administrator’s Interpretation cites a series of judicial decisions that use a multi-factor “economic realities test” to determine whether a worker is in business for himself or herself or is economically dependent on the employer. According to the DOL, most workers will be employees under the “economic realities” test. In assessing a worker’s status, employers should consider several factors, which include:

• The extent to which the work performed is an integral part of the employer’s business;
• The worker’s opportunity for profit or loss depending on his or her managerial skill;
• The extent of the relative investments of the employer and the worker;
• Whether the work performed requires special skills and initiative;
• The permanency of the relationship; and
• The degree of control exercised or retained by the employer.

The Administrator’s Interpretation warns that no single factor is determinative, and no one factor—particularly the “control” factor—should be given undue weight. Moreover, the factors should not be applied mechanically or in a vacuum by tallying them up, but should be applied with an understanding that they are indicators of the broader concept of economic dependence. What matters is not the label the employer or worker gives the relationship, but the economic realities of the relationship. The DOL also acknowledged that courts may consider additional factors depending on the circumstances of the individual case. The factors are merely “tools” to aid in the assessment: “it is dependence that indicates employee status.” Thus, individuals labeled independent contractors who work exclusively in support of a single customer for an extensive period will likely be deemed misclassified under this test and should instead be hired as employees of the business they support.

Integral Part of the Business

The Administrator’s Interpretation explained that if work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer. A true independent contractor’s work, on the other hand, is unlikely to be integral to the employer’s business. The DOL noted that work can be integral to the business even if the work is just one component of the business and/or the work is performed by hundreds or thousands of workers. Work can also be integral to the business if it is performed away from the employer’s premises, at the worker’s home, or on the premises of the employer’s customers. As an example, the Administrator’s Interpretation suggests that a software developer who develops customized software for a home construction company might be more easily classified as an independent contractor than a carpenter working for the same company.p>

Employers should thus be cautious of classifying workers that are integral to their businesses as independent contractors, even if those workers are integral to just a small part of the employer’s business and even if those workers are given the freedom to work from home or offsite.

Worker’s Opportunity for Profit or Loss

The Administrator’s Interpretation also explained that the focus in determining whether a worker has an opportunity for profit or loss should be on how the worker’s managerial skills affect that opportunity. Thus, decisions about hiring others, purchasing materials and equipment, advertising, renting space, and managing timetables are examples of managerial skill that can affect profit and loss. By contrast, a worker’s decision to work more hours or take on more work “do[es] little to separate employees from independent contractors—both of whom are likely to earn more if they work more and if there is more work available.

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