By Emily Emmons*

On July 15, 2015, the U.S. Department of Labor (DOL) issued Administrator’s Interpretation No. 2015-1.  This Interpretation concluded that “most workers are employees under the FLSA’s broad definitions.”  This article will explain the substance and impact of Interpretation No. 2015-1.

The clear message of the DOL’s Interpretation is that true independent contractors are rare and the classification should likewise be used sparingly.  The substance of the Interpretation is nothing surprising or new. Rather, the DOL has clarified that the ultimate question in determining whether a person is an employee or an independent contractor under the FLSA is the multi-factor “economic realities test,” which has been used by courts for years and focuses on whether the worker is economically dependent on the employer or in business for himself. None of these factors is determinative, nor should they should be applied mechanically in an effort to tally up a winning side. The DOL emphasizes, as often as possible, that the test is broader than the common law control test and should focus on whether the worker is really in business for himself or if he is dependent on his employer.

Background

Independent contractor misclassification is an increasing problem in the American workforce.  In a commissioned study by the U.S. Department of Labor, researchers found 10% to 30% of firms audited in nine states had misclassified employees as independent contractors.  See U.S. Government Accountability Office Report to Congress, GAO-09-717 (August 2009).  As far back as 1984, the I.R.S. estimated that “U.S. employers misclassified a total of 3.4 million employees, resulting in a loss of $1.6 billion (in 1984 dollars).”  Id. Approximately 10.3 million workers, or 7.4% of the workforce, are classified as independent contractors.  Where these employees are misclassified, it results in a substantial “wage theft” in the form of unpaid overtime compensation, as well as a significant loss of government tax revenue.

DOL’s Illustrations of Factors

With an illustration of how each factor should be applied, the DOL demonstrates the ultimate goal of deciding whether it is economically realistic to view a relationship as one of employment or not.

Is the Work an Integral Part of the Employer’s Business?- Obviously, work that is integral to the employer’s business is more likely to mean that the worker is economically dependent on the employer.  Work can be integral to an employer’s business even if it is just one component of the business. Cake decorating is obviously integral to the business of selling cakes that are custom decorated. Even work performed by thousands of workers can be integral to the employer’s business. Workers answering calls in a call center, with hundreds of others are performing integral work to the call center’s business.

Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss? - A true independent contractor has the opportunity to make a profit, but also to experience a loss. “Profit” in this sense does not include workers who have the opportunity to work overtime hours for more pay. Similarly, “loss” does not mean a reduction in wages. Rather, the imperative analysis is whether the worker exercise managerial skills (i.e., make decisions regarding routes, acquisition of materials, advertise services) and whether those skills affect his opportunity for both profit and loss.

How does the Worker’s Relative Investment Compare to the Employer’s Investment? - Courts must look not only to the nature of the investment but should compare it to the investment made by the employer. Even if the investment is a business investment, it must be significant in nature and magnitude. For example, oil rig welders’ investments in trucks costing $40,000 are not similar to hundreds of thousands of dollars of investment made by employers.

Does the Work Performed Require Special Skill and Initiative?- The DOL provides us with ample examples of what special skill and initiative is not, and only slight guidance as to what it is. A worker’s business, skills, judgment and initiative, not his technical or special skills are indicative of this factor.

Is the Relationship between the Worker and the Employer Permanent or Indefinite?- Permanency obviously is indicative of an employee relationship. However, the DOL suggests looking also to the reason for the impermanence and whether the worker relies on the employer as his primary source of income. By way of example, the DOL cites nurses who were hired part-time by a staffing agency and had the ability to “moonlight” by working for more than one staffing agency at a time and could choose when and where to make themselves available for work. Solis v. A+ Nursetemps, Inc. 2013 WL 1395863, at *7 (M.D. Fla. Apr. 5, 2013). These nurses were nonetheless found to be employees. However, this factor can still weigh in favor of an employee-employer relationship even if the worker is only employed for a very short time, but is employed for the entirety of that industry’s “season.” (Migrant workers employed for the duration of the harvest season).

What is the Nature and Degree of the Employer’s Control? - The DOL is careful to remind us that this factor should not be overemphasized, but should be analyzed in light of the ultimate determination whether the worker is economically dependent. This factor asks whether the employer actually exercises control over meaningful aspects of the work. What employers could do is not relevant, rather courts must look to the economic realities of what sort of control employers actually exert.

Sixth Circuit’s Decision in Keller

Earlier this year, the Sixth Circuit decided Keller v. Miri Microsystems LLC, 781 F.3d 799 (6th Cir. 2015). Keller installed satellite-internet dishes for Defendant’s customers. Defendant is a satellite-internet-dish installation company. Defendant classified Keller as an independent contractor and therefore not eligible for overtime pay. The Sixth Circuit analyzed each of the six factors described by the DOL in its July 2015 letter, with an eye toward the ultimate question of whether Keller was economically dependent or independent from the Defendant.

Without much explanation, the Sixth Circuit held Keller’s services as a satellite-dish installer were integral to Defendant’s business as a satellite-dish installation and repair company. As to the permanency of the relationship, the Court noted that the trial court looked to three facts: (1) Keller did not have a contract with Defendant; (2) Defendant and Keller did not have an exclusive relationship because Keller could work for other companies; and (3) Keller exercised control over the number of days per week he worked. However, the Court did not find any of these reasons conclusive and specifically stated that the court should not consider the existence or absence of a contract, and that employees may work for more than one employer without losing their employee status under the FLSA. Ultimately, the Court found genuine issues of material fact but it first made clear that Keller’s investments were minimal in comparison to Defendant’s investments. Keller provided his own vehicle, paid for gas, used his own tools, purchased some cable to provide to clients and other minor equipment.

Largely, the Sixth Circuit’s discussion of each of the factors tracks identically, in both language and intent, to the DOL’s July 2015 Interpretation. The only exception is the factor which analyzes whether the work requires special skill and initiative. The Sixth Circuit focused on the degree of skill required for Keller to do his job, how he acquired these skills, and whether the level of skill affects the worker’s success. Although the DOL provides little definitive guidance, it seems to recommend that courts focus not on the level of the worker’s technical skill, but on whether the worker exercises business skill, judgment and initiative.

Conclusion

The DOL’s 2015-1 Administrative Interpretation solidifies their stance that under the FLSA’s broad definition of employment, most workers are employees. And the Court’s decision in Keller demonstrates that the Sixth Circuit is extremely close to being entirely in sync with the DOL concerning independent contractors. 

_________________________

*Emily Emmons is an associate at Gilbert Russell McWheter Scott Bobbitt’s Nashville office where she practices employee rights law and civil litigation. She is a graduate of Belmont University College of Law. Emily may be reached at 615-354-1144 or eemmons@gilbertfirm.com.