TOP TIP: DOL Offers Guidance on Determining Independent Contractor Status Under the FLSA

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The Department of Labor issued an opinion letter in which it details the principles by which independent contractor status under the Fair Labor Standards Act should be determined. This letter outlines the DOL’s latest position on this controversial topic and provides significant guidance to employers.

The DOL’s Changing Positions. The FLSA covers “employees,” broadly defined as “any individual whom an employer suffers, permits or otherwise employs to work.” But it does not cover independent contractors, which leads to the question of whether an individual is an employee or independent contractor. The issuance of this guidance on independent contractor status follows the DOL’s 2017 withdrawal of a 2015 DOL Administrator’s Interpretation on the topic that had been issued under the Obama administration and that expansively asserted “most workers are employees under the FLSA’s broad definitions.” As discussed in our July 2018 E-Update, the DOL subsequently issued a Field Assistance Bulletin on the employer status of nurse or caregiver registries, in which it retreated to a historical “economic reality” approach, under which it reviewed the “totality of the circumstances to evaluate whether an employment relationship exists.”

The DOL’s Current Test for Independent Contractor Status. The DOL reiterates its “economic reality” approach, and notes that “the touchstone of employee versus independent contractor status has long been ‘economic dependence.’” Whether an individual is economically dependent on a potential employer is a fact-specific inquiry, in which six factors are assessed:

  • The nature and degree of the potential employer’s control. The DOL notes that “A business may have control where it, for example, requires a worker to work exclusively for the business; disavow working for or interacting with competitors during the working relationship; work against the interests of a competitor; work inflexible shifts, achieve large quotas, or work long hours, so that it is impracticable to work elsewhere; or otherwise face restrictions on or sanctions for external economic conduct, among others.”
  • The permanency of the worker’s relationship with the potential employer. According to the DOL, “Permanence arises where a business, for example, requires a worker to agree to a fixed term of work; disavow working for or interacting with competitors after the working relationship ends; or otherwise face restrictions on or sanctions for leaving the job in order to pursue external economic opportunities, among others.” The DOL further notes that the existence of a longstanding relationship may also indicate permanence.
  • The amount of the worker’s investment in facilities, equipment, or helpers. The DOL states that if the business provides these, the worker may come to rely on them to the detriment of his ability to provide services to others, which increases his economic dependence on the business.
  • The amount of skill, initiative, judgment, or foresight required for the worker’s services. If the work is more like piecework, and the business can provide the worker with the skills necessary to perform the job, then the worker is likely an employee.
  • The worker’s opportunities for profit or loss. According to the DOL, such opportunities support independent contractor status and “These opportunities typically exist where the worker receives additional compensation based, not on greater efficiency, but on the exercise of initiative, judgment, or foresight (e.g., commission); has flexibility to renegotiate compensation throughout the working relationship; or has capital expenditure at risk in the job.” Moreover, the worker need not have sole control over such opportunities in order to support an independent contractor finding.
  • The extent of integration of the worker’s services into the potential employer’s business. According to the DOL, “a worker’s services are integrated into a business if they form the ‘primary purpose’ of that business.”

In addition, other factors may be relevant, and the weight assigned to each factor is dependent on the facts. The assessment is based not upon counting factors, but assessing the circumstances of the whole activity.

In the opinion letter, the DOL applied these factors to determine that service providers working for a virtual marketplace company (VMC) in the “on-demand” or “sharing” economy are independent contractors. A VMC is an online and/or smartphone based referral service connecting service providers to end-market consumers for a variety of services (e.g. transportation, delivery, shopping, moving, cleaning, plumbing, painting, household services, etc.), using technology to match consumers to service providers through objective criteria.

Employers may rely on this opinion letter as the DOL’s (current) position on the independent contractor analysis. Note, however, that the test for independent contractor status differs under various laws, and those tests may be in flux. For example, as we discussed in our January 2019 E-Update, the National Labor Relations Board has recently returned to a longstanding independent contractor analysis that had been briefly overturned under the Obama administration. In addition, federal courts may have adopted different and potentially more expansive versions of the test under the FLSA.