The Feds’ War on Employee Misclassification

Seeking to clarify the issue of just what it is that distinguishes an independent contractor from an employee, the Department of Labor yesterday  issued its first Administrator’s Interpretation (AI) of the issue as it pertains to the Fair Labor Standards Act. The issue has only grown more heated in recent months with the rise of “gig economy” companies such as Uber and Lyft, along with long-running disputes between companies and workers such as FedEx Ground’s dispute with its drivers, who claim they were misclassified as independent contractors.

Written by the DOL’s Wage and Hour Division Administrator, David Weil, the 15-page memo states that the misclassification of employees as independent contractors “is among the most damaging to workers and our economy.” It emphasizes the WHD’s six-factor economic realities test that’s used to determine a worker’s status along with what a just-released briefing from law firm Seyfarth Shaw describes as “an extremely expansive reading of the FLSA’s ‘suffer or permit to work’ definition of ’employ.'”

“Combined,” the Seyfarth Shaw briefing says, “WHD’s efforts indicate a significant hostility towards the use of independent contractors.”

An agreement between an employer and a worker stating that the worker is an independent contractor “is not indicative of the economic realities of the working relationship and is not relevant to the analysis of the worker’s status,” Weil’s memo states. The true measure of whether a worker is an employee or an independent contractor, Weil writes, is the extent to which the worker is economically dependent on the employer. A worker who is really in business for him-or-herself is an independent contractor, he notes; a worker who is economically dependent on the company is an employee.

Weil’s AI serves as a reminder to employers to regularly question their independent-contractor classifications as a part of their global risk audits, writes Michael Droke, a partner in the labor and employment division of Dorsey and Whitney. They should also be keeping records on the process used to determine whether one is an independent contractor or employee, and ensure that those classified as independent contractors aren’t given rights or access that may call their status into question, he writes: “For example, contractors should not have internal email accounts, should not be given server access, and should not be invited to employee functions.”

Weil’s AI is yet one more piece of evidence that the federal government is aggressively seeking out employers that misclassify (either deliberately or by mistake) employees as independent contractors and that businesses must proceed very carefully in this area, according to the Seyfarth Shaw memo.

“The guidance now makes it likely that DOL investigations and enforcement actions and private litigation contesting the classification of such workers will intensify,” the Seyfarth Shaw attorneys write. “Businesses should, therefore, carefully evaluate the DOL’s guidance and its potential impact on their operations.”