The government takes strong measures against misclassification of workers
Independent contractors have become commonplace in the construction industry. However, federal regulators and others
believe some employers may be misclassifying employees as independent contractors.
In an effort to combat misclassification by employers, the Department of Labor's (DOL's) Wage and Hour Division
released an Administrator's Interpretation (AI) July 15 to help differentiate employees from independent contractors.
The AI is an effort to protect workers who do not enjoy the benefits of employees; increase revenues for the government
through employment taxes that often are lost through independent contractor arrangements; and prevent an uneven playing
field for employers who properly classify employees.
The AI examines the "economic realities" test commonly used by the courts and broadly interprets the Fair Labor
Standards Act's (FLSA's) use of the "suffer or permit" definition of "employ." It is stated no single economic reality
factor should be the determining factor—they should be viewed collectively. Under the new guidance, it will be
far more difficult for employers to classify workers as independent contractors.
The ultimate inquiry under the FSLA is whether workers are economically dependent on their employers or truly in
business for themselves. If a worker is economically dependent on an employer, he or she is an employee. If a worker is
in business for himself or herself, the worker is an independent contractor.
The following factors typically are considered when determining whether an employment relationship exists under the
Integral to the business—Although the AI states no single factor determines a worker's status, this factor
is described as "compelling." Work can be integral to a business even if the work is just one component of the
business or performed by multiple workers.
Profit or loss potential—The AI states "it is important not to overlook whether there is an opportunity for
loss, as a worker truly in business for themselves faces the possibility of experiencing a loss."
Relative investment—The AI states the "worker's investment must be significant in nature and magnitude
relevant to the employer's investment" to be considered an independent contractor.
Skill and initiative—The AI emphasizes a worker's "business skill, judgment, and initiative" rather than
Permanency of relationship—If a worker is permanently tied to the business, he or she would be classified
as an employee. In the case of seasonal employment, "the proper test for determining permanency of the relationship
is not whether the workers returned from season to season, but whether the worker worked for the entire operative
period of the season."
Degree of control—"Control is only significant when it shows a worker exerts such a control over a
meaningful part of the business that they stand as a separate economic entity."
The AI conclusion states: "Most workers are employees under the FSLA's broad definitions." The AI squarely focuses
on workers being in business for themselves and not economically dependent on employers.
DOL has been clear it aggressively is pursuing businesses that misclassify workers. If employers are found to have
misclassified workers, they face civil and criminal penalties, as well as back pay to the workers and unpaid employment
taxes to the government. Business owners who use independent contractors should examine the AI and review the nature of
their relationships with their workers to ensure they are in compliance with the stronger interpretation of the
For more information about DOL's initiative, click here.