Employee or Independent Contractor? Enforcement Coming.
On June 30, 2015, after more than 15 months of waiting, the 295 page Notice of Proposed Rulemaking (“NPRM”) on overtime and administrative exemptions was released. Though this does not cover the identification and classification of Independent Contractors versus Employees, Wage and Hour Division Administrator David Weil issued an Administrator’s Interpretation letter regarding the status of Independent Contractors versus Employees on July 15th, 2015.
It should not come as a surprise that the WHD has put out Administrator’s Interpretation No. 2015-1, Subject: ‘The Application of the Fair Labor Standards Act’s “Suffer or Permit” Standard in the Identification of Employees Who Are Misclassified as Independent Contractors’, at the same time that NPRM on overtime exemptions has been opened for comment. Both are congruent on each other to make sure that everyone performing duties for an employer are correctly classified. It is also a reminder that there are very specific “rules” to 1099- independent contractors, and that it is not an option to classify as such to possibly avoid the upcoming changes to overtime exempt status. The Interpretation Letter clearly narrows the definition of “Independent Contractor”, and states “in sum, most workers are employees under the FLSA’s broad definitions… The very broad definition of employment under the FLSA as ‘to suffer or permit to work’ and the act’s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor.” Be warned that the economic realities test regarding Independent Contractors is the main determinative for Employee vs. Independent Contractor, but that no single factor is weighed heavier than another. Rather the qualitative result of all 6 factors determine the outcome of Independent Contractor or Employee.
- The extent to which the work performed is an integral part of the employer’s business.
- The worker’s opportunity for profit or loss depending on his or managerial skill.
- The extent of the relative investments of the employer and the worker.
- Whether the work performed requires special skills and initiative.
- The permanency of the relationship.
- The degree of control exercised or retained by the employer.
As a business you should take this letter as indication for the need to review any arrangements and agreements regarding anyone paid as an independent contractor, to make sure that they do comply with the rules regarding 1099 Independent Contractor status. Though the letter does not state any new legislation or compliance obligations, it may be seen as a foresight that there will be more enforcement to come on the Contractor vs. Employee front.