There is seldom a bad time for employers to reevaluate employee classifications. While some occasions are less optimal than others, for example, reevaluation upon an employer’s receipt of a complaint from the United States Department of Labor (“DOL”), employers should carve out time each year to scrutinize changes in employee assignments and relationships, along with other factors that impact classification.
The Fair Labor Standards Act (“FLSA”) offers minimum wage and overtime pay protections to almost all workers in the United States. Assuming for the purposes of our discussion that an employer is subject to the FLSA, there are certain factors that necessarily impact the independent contractor versus employee-employer analysis. At base, “In the application of the FLSA an employee, as distinguished from a person who is engaged in a business of his or her own, is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which he or she serves.”1
The critical determination is, perhaps based upon the most nebulous standards – as the U.S. Supreme Court has, time and again, indicated that no single rule, test or standard, alone, dictates classification. Rather, the current standard applied by the Court looks, on the whole, at the “total activity or situation.”2 Factors included in this analysis are:
- The extent to which the services rendered are an integral part of the principal’s business.
- The permanency of the relationship.
- The amount of the alleged contractor’s investment in facilities and equipment.
- The nature and degree of control by the principal.
- The alleged contractor’s opportunities for profit and loss.
- The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
- The degree of independent business organization and operation.3
The Court adds clarity by highlighting certain factors which are immaterial in determining whether there is an employment relationship.4 For example, the place where work is performed, the absence of a formal employment agreement, or whether an alleged independent contractor is licensed by State/local government are not considered to have a bearing on determinations as to whether there is an employment relationship.5 Additionally, the Supreme Court has held that the time or mode of pay does not control the determination of employee status.6 What happens next in the analysis is (typically) an evaluation of the relationship in which courts will consider the above-factors, while taking into account the industry, the nature of the work, and other situation-based considerations. Because these situations are routinely fact-intensive, it is worthwhile for employers to revisit classifications when making changes in their workforce.
Despite the oft-repeated refrain, “everyone in our industry classifies workers this way”, common industry practice is insufficient to excuse employer misclassification of employees – whether or not willful. Employers should be especially careful about taking cues from their competition. Simply because other employers in your industry classify employees as independent contractors, does not make it accurate. Equally unpersuasive in misclassification cases is an employee’s “agreement” to be misclassified, whether informally or via written employment agreement – even if the employment contract specifically defines an employee’s relationship to the employer as that of an independent contractor. Employers should also be aware that while an employee may be an independent contractor pursuant to state law or Internal Revenue Service standards, the FLSA may still create an employer/employee relationship where, for tax purposes or under state law, the analysis produces a different result.
What do you risk by failing to properly classify your employees? Employees may file complaints with the Wage and Hour Division of the DOL. Employees may also file private lawsuits to recover back pay, and liquidated damages, in addition to court and attorneys’ fees. The Wage and Hour Division of the DOL is also empowered bring its own enforcement actions. A two-year statute of limitations applies to actions to recover back pay. However, if a violation is “willful”, a three-year statute of limitations may apply.
The takeaway: Employers should make time before the end of the year to reevaluate their employee relationships and policies. Should you have any questions about this article or labor and employment law, please contact one of our employment lawyers.
1 “Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA)”, https://www.dol.gov/whd/regs/compliance/whdfs13.htm (last accessed 9/12/2019).