Update on Department of Labor’s Guidance on Classifying Workers
Earlier this year, the Department of Labor reaffirmed the use of the economic reality test for determining whether a worker is an employee or independent contract under the Fair Labor Standards Act (the “Act”). Previously, the Department published a final rule that used a different test, but this rule never went into effect. Classification of a worker as an independent contractor versus an employee is important in determining whether or not such worker is entitled to overtime compensation.
The economic reality test looks at the total activity or situation to determine if a worker is an employee or independent contractor. A court looks at seven factors in applying the economic reality test, and no one factor is dispositive.
The extent to which the services performed by the worker are an integral part of the potential employer’s business.
The permanency of the relationship between the worker and the potential employer.
The amount of the worker’s investment in facilities and equipment.
The nature and degree of the potential employer’s control over the work.
The worker’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 worker.
The degree of independent business organization and operation.
Factors such as where the worker performs the work and the absence of a formal employment agreement are immaterial.
Whether a worker is an employee or independent contractor under the Act has substantial practical consequences. If an employer misclassifies a worker as an independent contractor when the worker should have been classified as a nonexempt employee, the employer will owe the worker for any unpaid wages and overtime. The misclassified worker can also sue the employer and potentially recover liquidated damages and attorneys’ fees.
All Department of Labor guidance on the Fair Labor Standards Act can be found at dol.gov. The author thanks law clerk Jozie M. Barton for her assistance with this article.