Avoid “Victimizing” Your Workers
by Jennifer Villier, JD
WealthCounsel, Legal Education Faculty
In recent years, the U.S. Department of Labor has intensified its focus on the misclassification of employees as independent contractors. In its written materials on the subject, the DOL’s stance has shifted from impartial educator to supportive advocate for misclassified employees. In light of the DOL’s efforts (its “Misclassification Initiative”), attorneys should counsel business clients about the increased emphasis on employee misclassification, and the need to become and remain compliant with relevant state and federal laws.
DOL Guidance and Resources
Administrator’s Interpretation No. 2015-1
In the summer of 2015, the DOL issued Administrator’s Interpretation No. 2015-1. The Administrator’s Interpretation offered business owners practical guidance on the proper classification of an “employee” versus an “independent contractor.” The impetus behind this document was that the historic “economic realities” test, widely used by courts when determining a worker’s classification, consists of several factors that have over time been applied inconsistently and with certain factors given disproportionate weight.1
Employers were having a difficult time classifying their workers because of the ambiguity of the factors comprising the test. While the Administrator’s Interpretation did not change or reject the economic realities test, it shed light on proper application of the test based on a given employer’s circumstances.
In determining whether an individual is classified as an “employee” or an “independent contractor,” the DOL instructed that more attention and focus must be placed on the collective factors that make up the working relationship between an employer and its laborers, with no one factor being determinative. Additionally, the DOL emphasized that most workers are employees under the Fair Labor Standards Act (FLSA) due to the statute’s broad definition of the term “employ.” Therefore, the DOL’s Misclassification Initiative is aimed at identifying those employees that are intentionally misclassified as independent contractors because of the manipulation of one or more factors of the economic realities test, often as a way to cut costs and avoid compliance with labor laws.
In the summer of 2016, the DOL released a publication (“Misclassification Mythbusters”) providing further guidance through a series of 12 questions and answers.2 Rather than educating employers, as in Administrator’s Interpretation No. 2015-1, the DOL’s Misclassification Mythbusters sought to teach workers about their employment status and rights. Some commentators characterized Misclassification Mythbusters as persuasive in nature, prompting contractors to challenge their employer on the appropriateness of their contractor status.3
Commentators also pointed out several inaccuracies and inconsistencies in Misclassification Mythbusters. For example, the publication states that a worker is presumed to be an employee under each state’s unemployment insurance law, unless certain tests are passed that indicate the worker is an independent contractor. However, state unemployment laws differ considerably, and not every state presumes a worker to be an employee. Furthermore, Misclassification Mythbusters states that under the FLSA, a worker is an employee if his work indicates that he is economically dependent on his employer. However, the FLSA test for determining proper status consists of several factors, and is not limited merely to consideration of economic dependency.
Nonetheless, the DOL’s Misclassification Mythbusters signaled a clear shift in its targeted audience related to identifying misclassified employees. Directed towards workers, rather than employers, the publication seeks to educate workers and arm them with examples to refute employer claims that independent contractor status is proper.
Independent Contractor Misclassification Website
Continuing the trend towards worker-friendly resources, in December, 2016, the DOL released a new website devoted to independent contractor misclassification.4 The website featured stories of two individuals—a taxi driver and a masonry contractor—who were each a “victim of misclassification.” According to the taxi driver, being misclassified as an independent contractor “was just like modern day slavery.” Among the resources available to readers of the website are publications such as:
• Anti-Retaliation/Anti-Discrimination Rights for Workers;
• Pay and Misclassification; and
• Health Care and Retirement Benefits – Information on Employer-Sponsored Benefit Plans
According to the website, the DOL “supports the use of legitimate independent contractors,” but disparages the deliberate misclassification of employees as independent contractors in an attempt to cut costs. The DOL states that everyone loses when employees are misclassified. Workers lose the protection of employment laws and rights to employer-sponsored benefits, businesses subject themselves to fines and liability for unpaid wages and taxes,5 and governments lose revenue, which undermines the economy.
The DOL’s website also provides the organization’s press releases dating back to 2010. These press releases summarize misclassification proceedings both nationally and in various regions of the United States. As announced via press releases in recent years, the DOL has contracted with over 30 states help enforce proper classification of workers. The DOL’s Misclassification Initiative and partnerships with the states is intended to “change behavior at the industry level” and thus address the DOL’s worker protection, revenue, and economic concerns.6
The DOL is scrutinizing the classification of independent contractors versus employees. As a result, business attorneys should counsel clients on minimizing the risks of independent contractor misclassification and remaining compliant with federal, state and local laws. For example, attorneys should review existing independent contractor relationships and, if necessary, revise or restructure independent contractor agreements. Businesses may also need to reclassify independent contractors as employees and consider hiring them via staffing or workforce management firms. Because hiring arrangements with staffing or workforce management firms create potential joint employer liability,7 attorneys should retain the co-counsel specializing in employment law when necessary if using these arrangements.
1 Administrator’s Interpretation No. 2015-1 identified these factors as:
(1) Is the work an integral part of the employer’s business?
(2) Does the worker’s managerial skill affect the worker’s opportunity for profit and loss?
(3) How does the worker’s relative investment compare to the employer’s investment?
(4) Does the work performed require special skill and initiative?
(5) Is the relationship between the worker and the employer permanent or indefinite?
(6) What is the nature and degree of the employer’s control?
2 The 12 Myths are:
(1) If I am an independent contractor under one law, I am an independent contractor under other laws. (2) If I am an independent contractor, I am not eligible for unemployment insurance.
(3) I received a Form 1099 from my employer so I am an independent contractor.
(4) It does not matter if I am classified as an independent contractor or an employee.
(5) I am an independent contractor because I signed an independent contractor agreement.
(6) I am not on the payroll, so I am not an employee.
(7) I have my own employer identification number (EIN) or paperwork stating that I am performing services as a LLC or other business entity. This means I am an independent contractor.
(8) My employer wants me to be an independent contractor, and that means I am not an employee.
(9) I telework or work off-site, so I am an independent contractor.
(10) I have been an independent contractor for years; this means I will continue to be an independent contractor.
(11) I operate a franchise, so I am an independent contractor.
(12) I am an independent contractor because it is established practice in my industry to classify workers like me as independent contractors.
3 See Stott and Ripke, “DOL Releases Updated Independent Contractor ‘Misclassification’ Website” (Perkins Coie, December 22, 2016). See also Reibstein, Richard J., “‘Misclassification Mythbusters”: The Labor Department’s Latest Effort to Crack Down on Independent Contractor Misclassification” (Pepper Hamilton LLP, August 22, 2016).
5 An August 2, 2016 DOL News Release announced that Force Corp. and AB Construction Group, Massachusetts entities that intentionally misclassified 478 employees as independent contractors to avoid paying overtime wages and other benefits. The employers were ordered to pay over $2.4 million in back wages and liquidated damages to the affected employees. They were also ordered to make, keep and preserve accurate records of employees’ wages, work hours and working conditions, as required by the FLSA.
6 DOL News Release, August 2, 2016.
7 A 2014 case out of the 4th Circuit Court of Appeals helps to illustrate joint employer liability in this context. In Butler vs. Drive Automotive Industries, No. 14-1348, a company that had hired a worker through a temporary employment agency was held liable in an employment discrimination action under the theory of joint employer liability. Despite the company’s measures to establish the individual as an independent contractor (e.g., she wore a staffing agency uniform, parked her car in the staffing agency area, and she was paid by the staffing agency), the plaintiff argued that she was supervised and evaluated by company employees and, therefore, worked for both the company and the employment agency. The Court agreed, finding that both the company and the staffing agency exercised control over various aspects of the individual’s employment. The Court held that a joint employer relationship existed among the parties and the company could be held liable as an employer despite its attempts to structure an arrangement with an independent contractor.
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