Classification Ramifications: Independent Contractor vs. Employee

          Employers must be aware of the rapidly changing body of law on the misclassification of workers.  Classification of workers as independent contractors rather than employees is covered by a wide range of federal and state laws.  Making the wrong decision about the classification of an employee can expose an employer to liability under wage and hour laws, antidiscrimination statutes, the National Labor Relations Act and state laws on payroll tax obligations, workers’ compensation and unemployment insurance.

          This article focuses on recent developments in wage and hour law.  Traditional business models and practices are coming under fire in wage and hour litigation and labor cases. 

          Department of Labor (“DOL”) enforcement of the Fair Labor Standards Act (“FLSA”) is a significant factor in wage and hour law, and the DOL is making the misclassification of employees an enforcement priority.  Industry custom is not a defense to a company’s noncompliance with wage and hour laws.  The DOL is concerned that some employers still are trying to circumvent their minimum wage and overtime obligations by labeling employees as independent contractors, and the DOL has prosecuted cases involving misclassification of cable installers, nurses, construction workers and others.  The DOL also has concluded memoranda of understanding with 26 states permitting federal and state agencies to work together.

          Currently, the major wage and hour cases are being decided based on whether individual workers are employees or independent contractors under the FLSA or state laws. The 80 year old test courts have typically applied to FLSA cases has become less rigid.  Although determining whether an individual is an employee or independent contractor usually is an issue of law for a court to determine, judges are increasingly leaving it to juries to decide factual disputes that can be critical to such a determination.

          A July interpretation of the FLSA by the administrator of the Wage and Hour Division (Administrator's Interpretation No. 2015-1) (135 DLR AA-1, 7/15/15), evidences the DOL’s commitment to enforcing the FLSA and the department’s confidence that the federal wage and hour law supports a vigorous enforcement effort against employers that have misclassified individuals as independent contractors.

          The FLSA definition of employee status is broader than the definitions in most statutes.  The DOL’s July interpretation applies the FLSA’s definition of to the 80 year old test courts have traditionally used to determine employee status under the FLSA. 

          The bottom line is, the DOL will no longer just tally the number of factors indicating or rebutting a claim of independent contractor status.  Instead, the department will take a close look at whether an alleged independent contractor is economically dependent on a principal, or whether the individual is independent—that is, whether the individual is in business for himself or herself.  This broadens the scope of employment relationships covered by the FLSA.

          Moreover, the Obama administration has expressed concern that the American middle class is being squeezed by economic conditions.  Noncompliance with minimum wage and overtime laws is part of that, and the misclassification of workers as independent contractors will remain a target of DOL enforcement.

          When dealing with independent contractor issues, employers should remember that there are different tests applied under various federal and state laws.  Employers need to be alert to changes in the law and avoid being overconfident about business practices that have been followed for years. 

          At Luchansky Millman, we focus on helping employers understand the changes in the law and the steps they need to take to minimize the risk of litigation and liability.  If you are interested in discussing recent changes in the law that may affect your business, or need to discuss threatened or actual litigation, call Bruce Luchansky or Judd Millman at 410.522.1020.

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