Contributed by Poirier Law Firm
Misclassifying employees as independent contractors – which is a way for companies to avoid fair employment and compensation rules and regulations – is “one of the most serious problems facing affected workers, employers and the entire economy,” according to the U.S. Department of Labor. But it may have just become a little more difficult for companies to deny its workers fundamental employee rights and benefits. On July 15, 2015, the U.S. Department of Labor’s Wage and Hour Division announced new guidance on how to determine who is an independent contractor and who is an employee under the law.
In recent years, the U.S. DOL and its corresponding state agencies, including the Georgia Department of Labor, have been scrutinizing the practice of misclassifying employees as independent contractors to avoid employment laws and regulations. This most recent DOL opinion, while not legally binding on the courts, is an effort to crack down on misclassification, noting that “most workers are employees” under the law.
Companies who misclassify their workers often do so in order to reduce costs. Small businesses or companies with low profit margins could face potentially disastrous additional expenses if their independent contractors are deemed to be employees. Unlike independent contractors, employees must have taxes withheld from their wages, and they are eligible for essential employee rights and benefits under the law. Misclassified workers may lose access to minimum wage and overtime protection, family and medical leave, unemployment insurance, safe workplaces, and workers’ compensation protections. In addition, federal and state governments lose significant tax revenue, which ultimately translates to losses in employee-based programs, such as state unemployment insurance and workers’ compensation funds.
Georgia courts have typically used an analysis known as the common law “control test” to assess whether a worker is an employee or an independent contractor. This test focuses on the degree of control or direction that the employer exerts over the worker. The recent DOL guidance, however, adopts an “economic realities” test. This test includes elements of the common law test, but broadens the scope of the analysis to address “whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor).” In announcing its new guidance, the DOL looked to the Fair Labor Standards Act, which defines employ as “to suffer or permit to work.” Applying this definition, a worker who is “economically dependent on an employer is suffered or permitted to work by the employer.”
The economic realities test, as interpreted by the DOL memorandum, includes the following factors:
- Is the work an integral part of the employer’s business?
- Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
- How does the worker’s relative investment compare to the employer’s investment?
- Does the work performed require special skill and initiative?
- Is the relationship between the worker and the employer permanent or indefinite?
- What is the nature and degree of the employer’s control?
The DOL memorandum made a point to note that no one factor – particularly the “control” factor, which is the heart of the common law control test – should “play an oversized role in the analysis of whether a worker is an employee or an independent contractor.”
The DOL’s new guidance shows that it will continue to aggressively pursue enforcement actions against companies that try to skirt the law. In fiscal year 2014 alone, the DOL Wage and Hour Division’s investigations resulted in almost $240 million in back wages for more than 270,000 workers.
But workers who have concerns about how they are being classified by their employer should speak up, and cannot simply count on the DOL or other agencies to step in. Although it is ultimately the company’s burden to prove independent contractor status, only you know all the facts and circumstances of your particular situation. Just because your company gives you the title of “independent contractor” doesn’t make it so – you could be missing out on essential employee rights and benefits to which you are entitled, including wages, leave, and workers’ compensation protections. If you are injured on the job, this distinction could become even more important, and you should have an experienced lawyer to help you navigate these obstacles.