WHAT THE GOVERNMENT IS GETTING AT: WHO IS AN EMPLOYEE?
Most workers who perform services for businesses are treated as employees of the business. Income and payroll taxes are withheld from their paychecks. The business pays its share of Social Security and Medicare payments for these workers. At the end of the year, the business sends them W-2 forms reporting their gross employment income and withholdings. These workers are employees who are covered by the Fair Labor Standards Act (FLSA), which is the minimum wage and overtime law enforced by the Wage and Hour Division (WHD) of the U.S. Department of Labor.
Many businesses also make independent contractor arrangements with individuals who perform services for the business. These individuals are not treated as employees. Payroll payments are not made to them; they are paid as vendors. No income or payroll taxes are withheld. At the end of the year, they are sent a Form 1099 which report the payments made to them by the business. The FLSA does not apply to these independent contractors because they are not employees.
Over past few years, the WHD has increased its attention on who is an employee (and thus subject to their enforcement control) and who is an independent contractor (and thus not subject to the WHD’s enforcement control). The WHD has teamed up with the Internal Revenue Service as part of WHD’s “Misclassification Initiative” to address this issue in the workplace. We have seen this increased attention by the WHD in minimum wage and overtime investigations for which clients have requested our assistance.
This increased scrutiny of independent contractor arrangements is focused on individual workers rather than businesses which themselves have multiple employees who perform the work. (Of course, federal labor agencies have other ways of trying to tie employers together for purposes of wage and hour liability. That is a subject we will write to you about soon.)
HOW THE WHD LOOKS AT INDEPENDENT CONTRACTOR STATUS
Recently, the WHD issued an “Administrator’s Interpretation” memo that discusses the enforcement approach of the WHD on this issue. One of the most noticeable aspects of the memo is the very clear emphasis on the idea that the definition of “employee” is very broad.
The memo discusses a multi-factor “economic realities” test, discussed below, but then goes on to say: “[T]he application of the economic realities factors should be guided by the FLSA’s statutory directive that the scope of the employment relationship is very broad.”
This point is repeated over and over again in the memo. What this means as a practical matter is that the WHD will assume that any individual worker is an employee unless it is convincingly demonstrated otherwise. Any doubts are likely to be resolved by treating the worker as an employee, not an independent contractor.
FACTORS CONSIDERED WHEN DECIDING WHETHER A WORKER IS AN EMPLOYEE OR AN INDEPENDENT CONTRACTOR
The “economic realities” test mentioned above has to do with whether the worker is “economically dependent on the employer or in business for him or herself.” That is the ultimate question. To answer that question, these are the typical “economic reality” factors that are considered: “(A) the extent to which the work performed is an integral part of the employer’s business; (B) the worker’s opportunity for profit or loss depending on his or her managerial skill; (C) the extent of the relative investments of the employer and the worker; (D) whether the work performed requires special skills and initiative; (E) the permanency of the relationship; and (F) the degree of control exercised or retained by the employer.”
There is much discussion in the recent WHD memo about each of these factors and how they will be evaluated. There is no particular “weighting” of these factors. Each situation stands on its own. The factors are to be considered and weighed in light of the overall consideration, which is whether the individual has his or her own business, or is instead economically dependent upon the employer.
Since this has become an enforcement priority for the WHD, and they are working with the Internal Revenue Service on this project, this would be a very good time to review and consider the status of any individual worker who is being treated as an independent contractor. We would be pleased to assist you with that review.
If you have any questions on this topic or need assistance, please contact our Labor & Employment Law Practice Group. We encourage you to subscribe to our Labor & Employment E-Briefs to get the latest HR news, tips, and updates.