Are you ready for the DOL’s attack on independent contractor status? 3 tips employers can use now to defend themselves later.

Like a ninja moving through the cover of darkness, the U.S. DOL “announced” in its latest Administrator’s Interpretation on a blog post a couple weeks ago its view of the independent contractor relationship.  In case you missed it, you better catch up … and fast. 

The head of the DOL’s Wage & Hour Division, David Weil, fired a broadside against all employers, proclaiming with incredible bravado that “most workers are employees under the FLSA.”  Independent contractors and employers alike, watch out.  Your relationship is about to go out the window.  (Gee, whatever happened to the constitutional right to freedom of contract?)

In a masterpiece of selective legal research, citing snippets from nearly century-old and decades-old caselaw, the DOL has clearly signaled its intentions to convert independent contractors everywhere into employees.  How does the DOL intend to do this?  Through a largely one-sided, revamped “economic realities” test involving several factors and pushing the envelope on those factors. 

I can’t dissect the DOL’s economic realities test and all of its factors here, but some highlights and examples the DOL cites in its interpretation will give you a flavor of its mindset:

The “integral part” factor.  This one should scare the pants off you.  According to the DOL, if a worker’s activities are integral to the employer’s business, he’s probably an employee.  And, as examples of presumed employees, the DOL points to workers who answer calls at a call center, whose activities the DOL says are integral to the call center’s business.  Another example the DOL offers of a likely employee rather than an independent contractor is a carpenter who frames homes for a construction business.  Seriously, I’m not making these up.  Can you guess who’s in the DOL’s crosshairs now?

The “managerial skill” factor.  This part of the economic realities test can be summarized as follows (with apologies to Jeff Foxworthy):  If the only way to make more money is to work more hours, you’re probably an employee.  According to the DOL, only when there is an opportunity for a loss, as well as a profit, could a worker be characterized as an independent contractor.

The “relative investment” factor.  The DOL says a worker’s investment in her own tools or equipment – “even if that investment is substantial” – is insufficient to prove independent contractor status.  Relying on a 10th Circuit decision with unique oil-field facts, the DOL proclaims that even if a worker spends $35-40,000 on equipment to perform her work, if that investment is smaller in comparison to the employer’s investment, then she’s an employee.  Can you think of many situations where an independent contractor’s investment or capital outlay is the same as the business engaging that contractor’s services?  Sometimes, but not very often.  Which of course is the DOL’s intent.  Heads I win; tails you lose.

The “nature and degree of control” factor.  Traditionally, the amount of control an employer exercises over a worker has been the touchstone in analyzing the issue of employee or independent contractor status in a variety of contexts.  But the DOL doesn’t like that factor, stating “the ‘control’ factor should not play an oversized role” in this analysis.  And one example of workers the DOL uses to downplay lack of control as a defense to employee status is at-home or offsite workers (another warning for employees using call centers or service reps.)  According to the DOL, if employers claim they need to exercise some control over an aspect of a worker’s activities due to the nature of their business, regulatory requirements, or customer satisfaction, control for “any or all of those reasons still indicates that the worker is an employee.”  Looks like the DOL getting ready to jump into the franchisor-franchisee fray, not unlike the NLRB and its joint employer campaign.

3 tips to brace yourself for the DOL’s independent contractor witch hunt

The misclassification crusade by the DOL toward independent contractors is hardly new.  Nor are the factors that make up the economic realities test.  What is new, however, are the broad generalizations the DOL now uses in explaining its multi-factor analysis. 

Either the DOL and its staff have never spent considerable time outside government employment, or at this point they have no fear in revealing their ham-handed regulatory view of the world.  Probably a bit of both in this instance.  The DOL’s view of economic realities simply doesn’t square with social realities in the workplace. 

So what’s an employer to do to protect itself against the imminent audits, enforcement threats, and the inevitable lawsuits from the DOL and private plaintiffs?  A few tips:

·       Treat employees like employees, and contractors like contractors.  While the DOL wants to marginalize the “nature and degree of control” factor, courts still consider that factor an important aspect in analyzing independent contractor issues. That being the case, always instruct your employees (especially supervisors) to observe the distinction between employees and independent contractors:

o   Don’t directly train contractors; have their employer handle the training, if that’s necessary

o   Don’t dress your contractors in your branded or logoed apparel; also, clearly mark a contractor’s vehicle as an agent of the employer

o   Don’t issue company IDs to contractors or include them in your employee contact directory

o   Do not discipline contractors; leave that to the contractor’s employer or terminate the contractor’s project as called for in the contract; avoid “discipline-like” terminology, such as suspension or warning or discharge 

·       The contract still matters.  Have your independent contractor sign an agreement with a provision confirming his independent contractor status, with a possible indemnity provision in case that status is successfully challenged.  Yes, I know, many courts hold that the parties’ contract is not determinative in these situations.  But the mere presence of such language may deter the contractor from pushing the issue.  And some courts take drastically different approaches to interpreting FLSA.  See, for example, Martin v. Spring Break ’83 Productions (upholding private settlement of FLSA claim without DOL supervision). 

·       Space out engagements of the contractor.  Not having the contractor working solely for you, or working for you indefinitely, allows for and may even force the contractor to seek other engagements.  That in turn reduces his economic dependency on you – a factor even the DOL concedes as indicative of an independent contractor relationship.  

Heard enough?  And if all this news wasn’t enough, the DOL’s blog announcement laid another land mine for employers.  In footnote 3 of its interpretation, the DOL stated that its analysis of employee status under FLSA also applies to FMLA (and to a lesser-known law, MSPA, dealing with migrant workers).  So, besides potential liability under FLSA for overtime, payroll taxes, and other employee emoluments, employers may unexpectedly find themselves liable under FMLA for adverse employment actions when letting go independent contractors!  Yes, you should be afraid.  Be very afraid. 

Your tax dollars at work, folks.

Good luck.

CAB

Chris Bourgeacq is a labor attorney who continues to believe in the constitutional right of freedom to contract, in a laissez-faire economy, and in hanging out at the beach whenever possible.  You can reach him at chris@cbqlaw.com or check out his website at cbqlaw.com.  The preceding article is for educational purposes only and not intended as specific legal advice.