FLSA Employees vs. Independent Contractors under DOL Administrative Interpretation AI 2015-1

FLSA Employees vs. Independent Contractors under DOL Administrative Interpretation AI 2015-1

Blanchard FLSAThe Fair Labor Standards Act (FLSA) has been the law of the land since it was first ushered through congress by President Franklin Roosevelt almost eighty years ago.  The FLSA promised a fair day’s pay for a day’s work, and required overtime pay at time and a half for working more than forty hours a week.  Yet for the last two decades, federal courts have struggled with the scope of the FLSA protections as the “outsourced” labor model has become more prevalent in the domestic economy.  In the fractured labor market -as it has been called – companies have increasingly used workers defined as “independent contractors” to perform their core business functions.   With one swift re-classification, the otherwise “employers” are able to reduce and avoid costs related to unemployment insurance, workers compensation, and even avoid obligations to pay overtime… or so some would assume. The protections of the FLSA are not dependent on the company’s discretion.   So-called ‘independent contractors’ and other workers deprived of overtime pay have a legal right to recover the wages stolen through illegal misclassifications by their employers.

Confronting the fractured economy, most federal appeals courts have analyzed a worker’s employee status under the FLSA using the “economic realities test.”  The test has become the accepted standard for determining whether an independent contractor is entitled to overtime pay or other protections of the FLSA.  In recent administrative guidance, the Department of Labor has embraced the broadest possible application of that test to protect workers under the FLSA.  The Department issued Administrative Interpretation No. 2015-1 on July 15, 2015. 

As the DOL guidance under AI 2015-1 notes, the “‘suffer or permit’ standard was specifically designed to ensure as broad of a scope of statutory coverage as possible.”  Under the AI, an entity “‘suffers or permits’ an individual to work if, as a matter of economic reality, the individual is dependent on the entity.” Although the intricacies of the test have varied among the circuits, the DOL describes the test as involving six primary questions:

1) Is the Work an Integral Part of the Employer’s Business?
2) Does the Worker’s Managerial Skill Affect the Workers Opportunity for Profit or Loss?
3) How Does the Worker’s Relative Investment Compare to the Employer’s Investment?
4) Does the Work performed Require Special Skill and Initiative?
5) Is the Relationship between the Worker and the Employer Permanent or Indefinite?
6) What is the Nature and Degree of the Employer’s Control?

The DOL reminds us in  AI 2015-1 that “the goal is not to tally which factors are met, but to determine whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor).”  Where courts have misapplied the test, workers who are not truly in business for themselves – from drivers and laborers to cable installers and even exotic dancers – are deprived of their rightful wages under the FLSA.  

The new AI affirms that the economic realities inquiry is not governed by the label put on the relationship by the parties or the contract language controlling that relationship, but rather focuses on whether, as one court has explained  “the work done, in its essence, follows the usual path of an employee.”   Following this thread, other courts have noted that, the employer’s label is not even relevant as a “tie breaker” since the FLSA is “intended to defeat rather than to implement contractual arrangements.”  Likewise, the designations workers use on their tax forms with the IRS are irrelevant to the analysis.   

Under the direction adopted by the Department of Labor’s new interpretation, the FLSA protects all people whom a company “suffer[s] or permit[s] to work” in the broadest possible terms.  “Independent contractor” classifications and contractual disclaimers are irrelevant.  If you work like an employee, the FLSA requires you get paid like an employee.  Obtaining workplace protections and the overtime wages typically owed to the misclassified independent contractor will depend on careful advocacy and guidance from an experienced FLSA litigator.  Lawyers familiar with the new DOL guidance may discover it to be an effective tool to guide the courts through proper application of the economic realities test – and ultimately in the fight against wage theft for misclassified independent contractors.