Employee Misclassification and the “Economic Realities” Test
A worker who performs a function that is an “integral part” of the employer’s business is less likely than ever to be treated as an independent contractor.
In a recent regulatory pronouncement
discussing the Fair Labor Standards Act (FLSA), U.S. Wage and Hour
Administrator David Weil addressed the issue of
misclassification of workers as independent contractors.
Administrators Interpretation No. 2015-1, which carries the force of
law, refers repeatedly to the economic realities test,
one of two tests commonly applied to determine whether an
employment relationship exists. It concluded that, under
that test, most workers are employees under the Fair Labor
Weil discussed six factors that are
commonly addressed by the courts in applying the economic
realities test. In addition to the five factors listed
below, one factor that the Wage and Hour Division appears to
weigh among the strongest in determining whether an
employment relationship exists is the one that refers to
whether the service performed by the worker is an integral
part of the alleged employers business.
Weil referred to the integral part
factor as compelling, but what, exactly, does integral
mean in this application?
The Interpretation provides one
example with reference to the construction industry, noting
that, for a company that frames residential homes,
carpenters are performing a service that is integral to its
business. In contrast, workers performing other services for
the same company (the example utilized was software
development services) are more marginal to the companys
business; thus, those workers are not integral.
In other words, is the worker
performing a service that is a part of the companys
ultimate product or service? If so, then it may be very
difficult, at least in the context of the FLSA, for a
company to assert that the worker should appropriately by
classified as an independent contractor. The Interpretation
specifically states that the factor of whether the workers
services are integral should be at least addressed in
virtually every circumstance.
The other factors discussed in the
the degree of the potential
employers right to control the manner in which the work is
to be performed;
the alleged employees
opportunity for profit or loss depending on his managerial
the potential employees
investment in providing the services, such as by purchasing materials or equipment, or
engaging the assistance of
the degree of skill
required to perform the services; and
the longevity and
permanence of the working relationship.
When the company is in control of
how the work is performed, or when a worker obtains the
lions share of their work from a single source, an
employment relationship will most likely be found.
In addition to addressing the issues
mentioned above, the Administrators Interpretation provides
agency guidance in connection with the Department of Labors
continuing enforcement efforts aimed at what it views as
widespread misclassification of workers as other than
Employers would do well to view the
Interpretation as a warning to employers that may have,
either intentionally or inadvertently, improperly
characterized employees as independent contractors.