Is the person working for your business an employee or independent contractor? It is an age-old question that could be costly for your business, if not handled correctly. In July, the United States Department of Labor (“DOL”) issued Administrator’s Interpretation No. 2015-1, which provided updated guidance on the misclassification of employees as independent contractors under the Fair Labor Standards Act (“FLSA”).
This latest Interpretation uses several examples of workers in the construction industry. Contractors and subcontractors using independent contractors should be aware of this latest Interpretation and understand that the Department of Labor views construction as a focus industry.
“The ultimate inquiry under the FLSA is whether the worker is economically dependent on the employer or truly in business for him or herself. If the worker is economically dependent on the employer, then the worker is an employee. If the worker is in business for him or herself (i.e., economically independent from the employer), then the worker is an independent contractor.” – Administrator David Weil
Employee or independent contractor under the FLSA? The latest DOL Interpretation looks at 6 factors in analyzing whether or not a worker is economically independent from the employer:
Factor 1: Is the Work an Integral Part of the Employer’s Business?
If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer. The Interpretation states that workers are more likely to be employees under the FLSA if they perform the primary work of the employer. Further, work can be considered integral to a business even if the work is just one component of the business.
The Interpretation gives the following example: “For a construction company that frames residential homes, carpenters are integral to the employer’s business because the company is in business to frame homes, and carpentry is an integral part of providing that service.”
Factor 2: Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
A true independent contractor faces the possibility to not only make a profit, but also to experience a loss. The worker’s managerial skills will often dictate whether or not the business will have a profit or loss. For example, decisions to hire other workers, purchase materials and equipment, advertise, rent office space and develop schedules are types of managerial skills that will affect profits or loss. The Interpretation is looking for the exercise of business judgment. The DOL will not look favorably if the only business decisions a worker makes are how many hours to work and how many projects they are going to accept from the employing company.
For example, consider an excavator operator who provides earthwork services. The excavator operator performs assignments only as determined by the same earthwork contractor; he does not independently schedule assignments with other earthwork contractors; he does not advertise his services or seek other assignments. The DOL will look at this scenario as indicative of an employee-employer relationship due to the lack of managerial skills on the part of the excavator operator.
In contrast an excavator operator who advertises his services, works for multiple earthwork contractors, hires other workers to assist him, decides which projects to perform and when to perform them probably exercises the managerial skills that affects profits and losses, which is indicative of an independent contractor relationship.
Factor 3: How Does the Worker’s Relative Investment Compare to the Employer’s Investment?
The worker must make an investment into his business (and therefore undertake a risk of loss) to be considered an independent contractor under the FLSA. But the DOL will not consider the worker’s investment alone. The DOL will compare the worker’s investment relative to the employing company’s investment. The DOL takes the position that a worker’s investment that is relatively minor when compared to the employing company indicates the worker is economically dependent on the employing company.
The Interpretation states investing in tools and equipment is not necessarily a business investment that indicates a worker is an independent contractor. A comparison to the investment of the employing company has to be considered. The Interpretation cites the example of a group of rig welders who each invested in trucks costing between $35,000 and $40,000. The rig welders’ investments were too small for them to be considered independent contractors when compared to the financial investments made by their employing company.
Factor 4: Does the Work Performed Require Special Skill and Initiative?
For this factor, the DOL will focus on the worker’s business skills, judgment and initiative and not his or her technical skills. The Interpretation provides the following example: “A highly skilled carpenter provides carpentry services for a construction firm; however, such skills are not exercised in an independent manner. For example, the carpenter does not make any independent judgments at the job site beyond the work that he is doing for that job; he does not determine the sequence of work, order additional materials, or think about bidding the next job, but rather is told what work to perform where. In this scenario, the carpenter, although highly-skilled technically, is not demonstrating the skill and initiative of an independent contractor (such as managerial and business skills). He is simply providing his skilled labor.”
Factor 5: Is the Relationship between the Worker and the Employer Permanent or Indefinite?
If a worker works for the same employing company for an extended period of time, the DOL will view this as indicative of the employee-employer relationship. For example, a framer who works for the same homebuilder for multiple projects in a row and no other homebuilders will be viewed as an employee. A framer who works for multiple homebuilders and turns down work from homebuilders because he is busy with other jobs shows a lack of permanence that is indicative of an independent contractor.
Factor 6: What is the Nature and Degree of the Employer’s Control?
The Interpretation states “[t]he worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his or her own business.” A worker who controls only the hours they work (having a flexible schedule) is not indicative of independent contactor status. The Interpretation provides examples of some employers who cite the nature of their business, regulatory requirements or customer satisfaction as reasons to assert control over workers. Even for those reasons, the DOL will take the position that the worker is an employee. The DOL is not interested in the reasons for control over workers. Control is control, and control indicates the worker is an employee, not an independent contractor.
None of these factors alone will determine whether a worker is an employee or independent contractor under the FLSA. All of the factors will be weighed together to determine whether the worker is truly in business for himself or herself. The ultimate determination under this analysis is economic dependence.
The Interpretation concludes by stating “most workers are employees under the FLSA’s broad definitions.” The construction industry is a focus indsutry for the DOL. Employers in the construction industry using independent contractors should pay close attention this latest Interpretation.