On July 15, 2015, the U.S. Department of Labor (“DOL”) issued guidance regarding the proper classification of workers as either employees or independent contractors for purposes of complying with the Fair Labor Standards Act (“FLSA”). The FLSA governs how people are compensated, e.g., on an hourly basis versus salaried employees. The DOL indicated that the misclassification of employees as independent contractors has continued to increase and employers need to pay special attention to this issue or face potential penalties.
The DOL stated that the definition of an “employee” under the FLSA is extremely broad and went so far as to say that most workers under the FLSA should be classified as employees rather than independent contractors. The DOL noted that just because the worker and the employer entered into a contract labeling the worker as an independent contractor, this is not sufficient to render the worker an independent contractor in actual fact. Rather, courts (and the DOL) evaluate whether a worker is properly classified as an employee or independent contractor by applying the “economic realities test.”
The particular elements of the economic realities test differ slightly between the various federal circuit courts. In the Fifth Circuit (which governs Texas), under the economic realities test, courts evaluate, whether the alleged employer:
- Possessed the power to hire and fire other employees;
- Supervised and controlled employee work schedules or conditions of employment;
- Determined the rate and method of payment; and
- Maintained employment records.
A party need not establish each element to prevail on a claim of misclassification and no single element is dispositive. However, courts will closely examine the amount of control the employer exercised over the worker and the worker’s relative degree of economic independence from the employer.
While the DOL takes an expansive view of the definition of an employee, courts continue to grapple with this issue and often apply the economic realities test more narrowly than suggested by the DOL. Nonetheless, employers should be careful when classifying a prospective worker as an independent contractor in order to avoid potential liability under the FLSA. If there is any question regarding the proper classification of a prospective worker, it is preferable to seek out the advice of counsel.
For further reading on this subject, here is a link to the DOL’s full guidance, http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.pdf, which contains several examples and explanations of the application of the economic realities test. This guidance followed shortly after the DOL’s proposed rule change to significantly broaden the scope of federal overtime regulations as previously discussed here, https://lawintheworkplace.com/2015/06/30/dol-releases-much-anticipated-proposal-to-change-overtime-regulations/.