Posted on August 05, 2015
Last month, the U.S. Department of Labor’s Wage & Hour Division, led by Obama appointee Dr. David Weil, issued an “Administrator’s Interpretation” (#2015-1), notifying American businesses that anyone who uses independent contractors better beware. An Administrator’s Interpretation is an official proclamation telling businesses how the U.S. government will “interpret” the federal wage and hour laws that apply to them. In this particular interpretation, the DOL is advising American businesses that “most workers are employees” under federal wage and hour laws – which is another way of saying, use independent contractors at your peril.
This is written as guidance – suggesting it is something helpful – to insure employers comply with the law as the DOL is interpreting it. However, the Interpretation reads more like a warning, identifying “problems” resulting from “misclassification” of employees as independent contractors. This assumes such classification is being done so American businesses can “cut costs,” avoid paying fair wages, and avoid paying taxes. According to the Interpretation, this is why the DOL entered into an understanding with the Internal Revenue Service and several state governments to help “combat” the misclassification of these workers. However, such a conclusion ignores the fact that, in many cases, using independent contractors allows companies (including many small companies) to lower overhead, thereby increasing economic opportunities for hard-working individuals to maximize their earning power and participate in a market economy limited only by their own ambition and resourcefulness.
The Interpretation issues from the premise that American businesses are primarily motivated to shirk the law and take unfair advantage of people. The DOL’s solution is to make sure that most workers are classified as “employees” instead of independent contractors so the government can extract its share of income tax withholding and social security contributions, and, in turn, subject the employer to more government control and regulation. This also has the effect of imposing more rules on the newly-classified employees themselves.
The Interpretation advocates a broad definition of “employee” so that it can capture the largest numbers possible. Courts have consistently decided who was considered an “employee” under the Fair Labor Standards Act, using what is referred to as an “economic realities” test to distinguish between disguised employees and those who are truly independent contractors by being “in business for him/herself.” As these court decisions are easy enough for experienced employment lawyers to follow when advising clients on classification decisions, the Interpretation is wholly unnecessary if the intent is just to enforce the law as written. The fact it was issued reveals an intent to go beyond existing legal precedents to expand the law’s reach.
For example, page 5 of the Interpretation states, “an agreement between an employer and a worker designating or labeling the worker as an independent contractor is not indicative of the economic realities of the working relationship and is not relevant to the analysis of the worker’s status.” Forget freedom of contract, the DOL is now going behind arm’s length agreements to tell parties what they really meant when they agreed to offer and accept work on mutually-agreeable terms. The “ultimate inquiry” under the statute is “whether the worker is economically dependent on the employer or truly in business for him or herself.” The word “dependent” is used throughout the memorandum to describe these misclassified employees, suggesting these individuals are not able to think, act or decide things for themselves, which is troubling for other reasons. According to the DOL, this leads to the inevitable conclusion that “most workers are employees under the [statute’s] broad definitions” and therefore entitled to the law’s “protections.”
Most importantly, this Interpretation tells businesses that the Department is not going to give a bright line, easy to follow rule to guide their decisions. If ensuring compliance were the real goal, then clear rules would be given. That would have been helpful. Instead employers are told the economic realities factors “should not be analyzed mechanically” and that “no single factor” will decide the matter. This suggests that employers are given flexibility to customize their relationships, but all it really does is create opportunities for the DOL to audit target employers, quibble with their classification decisions, and use them as examples for larger social purposes.
The employer’s take away from this guidance is to use “independent contractor” relationships with extreme caution, and when there are questions, invest in some experienced legal advice. This is going to affect the construction industry greatly because it is highly dependent on the valuable independent contractor relationships that are in use every day. Though the misclassification lawsuits against the giant employers are what grab the headlines, it is really the small businesses who are at the greatest risk of violations. For a complete copy of the Administrator’s Interpretation, go to www.dol.gov/whd/workers/Miscla.... If you have questions regarding the DOL Interpretation, or any other aspect of Ohio labor law, please contact Todd Harpst or Nick Horrigan, at Harpst Ross, Ltd. – Business Lawyers for the Construction Industry®, at (330) 983-9971 or firstname.lastname@example.org or email@example.com.
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