Could you Be Accused of Wage Theft?



By: Linda Fargo, CPA, Tax Manager  

On July 15th, 2015 Administrator David Weil of the U.S. Department of Labor (DOL) issued a far reaching Administrator’s Interpretation (AI) expressing their belief that “most workers [classified as independent contractors (IC)] are employees (E)” under the Fair Labor Standards Act’s (FLSA) broad definitions.

The difference matters!  Workers inappropriately characterized as IC lose out not only on minimum wage and overtime protections, but also on other benefits like workers compensation, unemployment insurance, and other job protections and perks only available to Es (vacation, sick time, etc.). In addition, governments lose out on taxes that support these programs. Wage theft!

In addition, when employers erroneously classify workers, they can often have an unfair competitive advantage because they pay substantially less for their workforce.

The DOL’s guidance consists of adopting the “economic realities” test in assessing whether a worker classified as an IC legally qualifies as an E, but making clear that this test should be applied in the context of the FLSA’s broad definition of “employ” as “suffer or permit to work”.

In his AI, Weil writes, “the ultimate inquiry under the FLSA is whether the worker is economically dependent on the employer or truly in business for him or herself.”

The six factors or questions in the “economic realities” test include:

1.) Is the work an integral part of the employer’s business?

 If yes, the worker is possibly an E.

2.)  Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?

 If no, the worker is possibly an E.

3.)  How does the worker’s relative investment compare to the employer’s investment?

If the worker’s investment is substantially less than the employer, the worker is possibly an E.

4.) Does the work performed require special skills and initiative?

 If not, the worker is possibly an E.

5.) Is the relationship between the worker and the employer permanent or indefinite?

If yes, the worker is possibly an E.

6.) What is the nature and degree of the employer’s control?

If the worker does not control meaningful aspects of the work performed such as it is possible to view the worker as a person conducting their own business, the worker is possibly an E.

When determining whether a worker is an E or IC, all the factors must be considered in each case.  No one factor alone is considered to be determinative.  The factors themselves “should not be applied in a mechanical fashion, but with an understanding that the factors are indicators of the broader concept of economic dependence,” according to Weil.

Although the AI represents the DOL’s opinion regarding the law on the IC vs. E issue and is not the law nor is it legally binding on courts interpreting the law, it is still significant because courts often give deference to an agency’s interpretation of statute or regulation that the agency is tasked with enforcing.  Also, the AI signals the DOL’s intention to aggressively pursue enforcement actions against companies that utilize independent contractors.

In light of the pronouncement, companies who use contract labor would be wise to review their IC relationships and to make sure their designation corresponds to the factors identified in the DOL’s new broader interpretation.