GM 15-055

U.S. Labor Department Issues Guidance on Employees versus Independent Contractors

On July 15, 2015, the Director of the U.S. Department of Labor issued new guidance to clarify the confusing line between a traditional employee and an independent contractor. The guidance is intended to cut back on worker misclassification, which occurs when workers are classified as contractors when they should be employees, and vice versa. The Department is responding to a significant increase in the number of people classified as contractors, which is important because contractors are not covered by workplace regulations such as overtime, occupational safety, and unemployment insurance. A copy of the new interpretation can be found here:

The Fair Labor Standards Act (FLSA) defines employees as “any individual employed by an employer.” 29 U.S.C. 203(e)(1). The FLSA also states that to “employ” is “to suffer or permit to work.” 29 U.S.C. 203(g).

The Department’s new guidance states that an economic realities test should instead govern the issue of worker classification. The Department states:
Ultimately, the goal of the economic realities test is to determine whether a worker is economically dependent on the employer (and is therefore an employee) or is really in business for him or herself (and is therefore an independent contractor).

The Department proposes that the economic dependence of a worker should be determined by using a six-part test based on:
1) Whether the work performed is an integral part of the employer’s business;
2) How the worker’s managerial skill affects his or her opportunity for profit;
3) How much the worker (and the employer) invests in a business or project;
4) Whether the work performed requires special skill or initiative;
5) Whether the worker’s relationship with the employer is permanent or indefinite; and
6) The nature and degree of the employer’s control.

The guidance states that no one factor is determinative and “each factor should be considered in light of the ultimate determination of whether the worker is really in business for him or herself…or is economically dependent on the employer.” The Department takes the position that the FLSA was originally intended to provide a broad scope of coverage for workers.

We note that the new guidance will have an impact on Indian tribes in certain jurisdictions.

The FLSA is a statute of general applicability which does not specifically include Indian tribes. Nevertheless, the question of whether Indian tribes are subject to the FLSA is disputed although certain federal courts of appeal have issued rulings.

The Seventh Circuit has held that the FLSA does not apply to an intertribal law enforcement agency. Reich v. Great Lakes Fish and Wildlife Commission, 4 F.3d 490 (1993). On the other hand, the Ninth Circuit has held that the overtime compensation provisions in the FLSA do apply to the employees of an Indian-owned retail store located on a reservation. Solis v. Matheson, 563 F. 3d 425 (9th Cir. 2009). The question of laws of general applicability is also being litigated in the Tenth and Sixth Circuit Courts of Appeal with regard to the National Labor Relations Act and there is the strong possibility that the U.S. Supreme Court will ultimately decide this issue.

Tribes whose operations are located within jurisdictions that apply the FLSA to Indian tribes should review the guidance to determine whether they have contractors who would be more properly considered employees, and vice versa. We note that the guidance is merely an interpretation and does not carry the force of regulation or law although the courts may likely conclude that the Department’s interpretation is entitled to agency deference.

We further report that a number of Democratic Members of Congress have introduced bills in the House and Senate to address worker misclassification. Senator Casey (D-PA) introduced S 1896 and Representative Wilson (D-FL) introduced HR 3427, both called the “Payroll Fraud Prevention Act”, which would add a definition for a “non-employee”, require all employers to classify workers as employees or non-employees, and further create a new classification of “covered employees.” Covered employees would include both employees as well as certain non-employees who are subject to IRS 6041A filings which apply to vendors and salespersons. The bill also would provide protections to workers who are fired or otherwise discriminated against as a result of their efforts to be reclassified as employees. Finally, the bill would increase penalties imposed on employers who misclassify their employees as independent contractors and who violate workers’ overtime or minimum wage rights. At this point it is hard to predict the likelihood of passage of such legislation, but it is noteworthy that Congress is aware of the issue and that some Members of Congress are seeking to take action.

Please let us know if you would like further information regarding the Department’s guidance or the application of the six-part test.