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DOL Issues Warning to Companies Misclassifying Employees as Independent Contractors

    Client Alerts
  • July 27, 2015
Employer misclassification of employees as contractors has filled recent newspaper articles and caught the attention of legislators in the Carolinas and beyond. Last week, the federal Department of Labor entered the fray, issuing an Administrator’s Interpretation setting forth the agency’s strict view on the limited circumstances under which workers are not subject to federal wage and other labor laws. The Interpretation follows a series of agreements between DOL and state governments intended to clamp down on companies that do not pay overtime, withhold payroll taxes or provide Workers’ Compensation or unemployment insurance coverage to workers.

The Interpretation stakes out an aggressive legal position for differentiating between employees and contractors. DOL says that the traditional common law control test used in making the distinction does not apply to enforcement actions brought under the Fair Labor Standards Act. Instead, the agency will use a narrower economic realities test, focusing on the workers’ economic dependence on the company, and the level of control exercised over the work performed.

DOL sets forth a number of factors used in making this determination. All workers will be considered employees unless the company using their labor demonstrates that their special level of skills and initiative, and the workers’ investment in their own businesses justifies the contractor classification. DOL also states that permanent or semi-permanent relationships will virtually always be deemed employment.

Last week, the Seventh Circuit Court of Appeals rejected claims from FedEx that certain drivers were contractors instead of employees. This interpretation may also have been prompted by recent actions brought against Uber and similar companies seeking to disrupt traditional businesses through use of contract labor. The Interpretation concludes by stating that the majority of workers are employees under the FLSA. This release should be read by companies using contractors to review their legal status and to make necessary changes in advance of increased regulatory scrutiny and enforcement actions from state and federal government agencies.