Aug. 3/10; Volume 30/Number 4
By Kathy Sibbald
In recent years the United States Department of Labor (DOL), the Internal Revenue Service (IRS) and more than 35 states have cracked down on businesses that misclassify their workers by treating them as if they are independent contractors when they are actually employees. Numerous state and federal agencies have taken a hard-line approach to worker classification, ramping up enforcement efforts and reclassifying thousands of workers across the country. Most recently, the DOL doubled down on its tough stance when it issued the Administrative Interpretation 2015-1 (AI 2015-1) on July 15.
AI 2015-1 makes it crystal clear that the DOL considers nearly every worker to be an employee, not an independent contractor, for purposes involving the Fair Labor Standards Act (FLSA). Under the FLSA, employers are required to pay most employees minimum wage or greater for every hour he or she works.
While the IRS relies on the common law test of direction and control to determine a worker’s status, and a number of states rely on a three-part test often referred to as the ABC Test, the DOL has always relied on the economic realities test to determine a worker’s status. In AI 2015-1, Dr. David Weil, administrator of DOL’s wage and hour division, describes the following six factors to be considered when determining a worker’s status:
- 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 upon his or her managerial skill
- The extent of the investment of the employer relative to the investment of the worker
- Whether the work performed requires special skill or initiative
- The permanency of the relationship
- The degree of control exercised or retained by the employer
In applying the economic realities test, Weil emphasizes that all factors must be considered and no single factor is determinative of a worker’s status. He also states clearly this is not a checklist and it is not to be interpreted in a mechanical fashion. The determination of a worker’s status for purposes of the FLSA requires a qualitative analysis as opposed to a quantitative one.
The publication of AI 2015-1 signals a warning to businesses that the DOL is taking the issue of worker misclassification very seriously and it fully intends to actively and aggressively seek out businesses which it believes have erroneously classified their workers. Sitting firmly at the top of its list of priorities is the construction industry.
What does this mean for the construction industry and the flooring industry in particular? Businesses that rely heavily on the services of skilled, but often part-time, temporary and transient independent contractors must be prepared to defend themselves against accusations of misclassification. Businesses must be able to provide sufficient evidence to show their workers truly own and operate independent businesses, over which the workers have complete managerial and financial control, and the workers are not economically dependent upon the business for their survival. Otherwise, the DOL will consider those workers to be employees.
As part of its Misclassification Initiative, the DOL has also entered into agreements with the IRS and at least 22 states that allow the federal and state agencies to share information about misclassification cases. As a result, a determination of misclassification by one agency can trigger a landslide of misclassification determinations by others for businesses that are unprepared.