Labor Department’s Guidance on Misclassification of Employees as Independent Contractors Aims High, Misses Mark

July 15, 2015 – The Department of Labor’s Wage and Hour Division Administrator today issued “interpretative guidance” aimed at stemming the “problematic trend” of misclassification of employees as independent contractors. The Administrator’s goal is righteous: Numerous commentators and judges have observed that the traditional tests for distinguishing between these two categories of workers seem ill-suited for the 21st century economy, and this area of law is in dire need of clarification. (For a discussion of this issue in connection with Lyft, Uber, and other companies in the burgeoning on-demand economy, click here.)

Despite the admirable motive, however, the interpretative memo relies on a legal analysis that is strained at best, muddying the law in an already challenging area. (Note that the memo is persuasive authority only; although courts may consider it, it lacks the force of law, so courts are not required to follow it.)

Seeking a Broader Definition of Employee

The Administrator begins with a correct premise: The Fair Labor Standards Act (“FLSA” or “Act”) defines employment more broadly than some other statutes, and somewhat more broadly than the common law definition. At common law, they key consideration was whether the employer had the right or ability to control the methods and means by which a worker accomplished his tasks. For example, if the worker set his own schedule, performed work off-site, invested in his own supplies, etc., he was likely an independent contractor rather than an employee.

The Act unhelpfully defines “employee” as “any individual employed by an employer.” (Great drafting, Congress!) An “employer” is “any person acting directly or indirectly in the interest of an employer in relation to an employee.” Given these truly circular definitions, courts would ordinarily assume that Congress meant to use the common law meanings of these terms – but there’s one wrinkle: The FLSA also provides that the definition of “employ” “includes to suffer or permit to work.” The Supreme Court has noted that the inclusion of this aspect of the definition results in coverage by the FLSA of “some parties who might not qualify as such under a strict application of traditional agency law principles.”

While it is true that the FLSA’s definition is broader than the common law definition, a/k/a traditional agency law principles, the Administrator’s attempt to use the “suffer or permit” language to essentially make the control test irrelevant and to render virtually every worker an independent contractor is unsupported by statutory or case law.

The Administrator, frankly, plays fast and loose with his citations of case law. For example, he writes that the “suffer or permit” standard “clearly covers more workers as employees” than the common law definition, citing the 1945 Supreme Court case of U.S. v. Rosenwasser. But the Rosenwasser Court said no such thing. In fact, there was no dispute in Rosenwasser as to whether the workers were employees, and the concept of an independent contractor is mentioned nowhere in the opinion. Nor did Rosenwasser discuss the meaning of “suffer or permit.” (Other cases relied on heavily by the Administrator similarly lack any discussion of independent contractors. For example, Walling v. Portland Terminal involved a determination of whether workers in a training program were employees or volunteers.)

Contrary to the Administrator’s unsupported contention that “suffer or permit” expands the class of workers who are considered employees – the history of that standard makes unmistakably clear that it was intended to expand the class of persons and organizations who the law would treat as employers.

The History of the “Suffer or Permit” Standard Does Not Support the Adminstrator’s Position

The “suffer or permit” standard developed in the context of child labor laws that pre-dated the FLSA. (For a good review of this history in California, see Martinez v. Combs.) As the Administrator himself recognized, before completing disregarding this history:

Prior to the FLSA’s enactment, the phase “suffer or permit” (or variations of the phrase) was commonly used in state laws regulating child labor and was “designed to reach businesses that used middlemen to illegally hire and supervise children.” Antenor v. D&S Farms, 88 F.3d 925, 929 n.5 (11th Cir. 1996). A key rationale underlying the “suffer or permit” standard in child labor laws was that the employer’s opportunity to detect work being performed illegally and the ability to prevent it from occurring was sufficient to impose liability on the employer. See, e.g., People ex rel. Price v. Sheffield Farms-Slawson-Decker Co., 225 N.Y. 25, 29-31 (N.Y. 1918). Thus, extending coverage of child labor laws to those who suffered or permitted the work was designed to expand child labor laws’ coverage beyond those who controlled the child laborer, counter an employer’s argument that it was unaware that children were working, and prevent employers from using agents to evade requirements.

Stated differently, laws including “to suffer or permit” in their definitions of “to employ” focused not on who counted as an employee – no one was arguing that the child laborers were independent contractors – but on which entities should be liable as employers.

The Suffer or Permit Standard Does Not Alter the Economic Realities Test

The Administrator, with no precedential support, links the suffer or permit standard to the previously uncontroversial “economic realities” test, which essentially states that the determination of whether a worker is an employee or an independent contractor cannot be made base on a technical or mechanical application of the common law test, but rather an examination of all the relevant facts to determine whether the worker is truly in business for himself – i.e., whether he is genuinely “independent.”

Specifically, the Administrator reasons that:

In order to make the determination whether a worker is an employee or an independent contractor under the FLSA, courts use the multi-factorial “economic realities” test, which focuses on whether the worker is economically dependent on the employer or in business for him or herself. A worker who is economically dependent on an employer is suffered or permitted to work by the employer. Thus, applying the economic realities test in view of the expansive definition of “employ” under the Act, most workers are employees under the FLSA. The application of the economic realities factors must be consistent with the broad “suffer or permit to work” standard of the FLSA.

This conflates two previously largely unrelated concepts. To be fair to the Administrator, the 11th Circuit did say in Antenor, cited above, that an “entity ‘suffers or permits’ an individual to work if, as a matter of economic reality, the individual is dependent on the entity.” But Antenor was a joint employer case, and the case it cited for this principle – which also did not involve issues of independent contractors – doesn’t really support it. Rather, in that case Goldberg v. Whitaker House Cooperative), the Supreme Court ruled that members of a cooperative were also employees, stating that “the ‘economic reality,’ rather than ‘technical concepts’ is to be the test of employment.” That is, originally, the economic realities test merely recognized that “in doubtful situations, coverage [of the FLSA] is to be determined broadly by reference to the underlying economic realities rather than by traditional rules governing legal classifications of master and servant on one hand, and employer and independent contractor on the other.” (See Walling v. Rutherford Food Corp.)

In short, the origin of the economic realities test had nothing to do with “suffer and permit.” It is difficult to find cases that actually analyze or apply “suffer and permit” outside the joint employer context – and even those cases cited by Administrator involve joint employer situations.

The Administrator’s View of the Economic Realities Test Downplays Important Factors

To analyze the “economic realities,” courts examine a non-exhaustive list of factors including: (1) the degree of control exercised or retained by the employer; (2) the extent to which the work performed is an integral part of the employer’s business; (3) the worker’s opportunity for profit of loss depending on his or her managerial skill; (4) the extent of the relative investments of the employer and the worker; (5) whether the work performed requires special skills; and (6) the permanency of the relationship between the worker and the principal.

The Administrator’s analysis goes to great lengths to minimize the importance of the “control factor,” to create a framework that is overwhelmingly likely to result in a finding of an employment relationship, and to somehow connect all of this to the “suffer and permit” language. For instance, the Administrator is correct that a worker whose “work [is] a part of the integrated unit of production” is probably an employee – but the lack of any cited authority for the statement that “[t]he policy behind the ‘suffer or permit’ statutory language was to bring within the scope of employment workers integrated into an employer’s business” is telling.

Similarly, while the economic realities test treats as two separate factors whether the worker has opportunity for profit or loss and whether the work requires “special skill,” the Administrator’s analysis obliterates the distinction between the two. The “profit or loss” factor involves an evaluation of the worker’s managerial skill – but if the special skill and initiative factor also relates solely, as the Administrator claims, to managerial skill and business judgment, how do the two factors differ? (Note that the Administrator says, without citing any support, that “[o]nly carpenters, construction workers, electricians, and other workers who operate as independent businesses, as opposed to being economically dependent on their employer, are independent contractors.” It’s unclear why those types of workers are presumed to exercise “special” business skills while other types of skilled workers are not.)

The Administrator’s View Would Lead to Unintended Consequences

Although the Administrator undoubtedly intended to influence courts and businesses to increase worker protections, his point of view would almost certainly negatively impact workers. First, the Administrator’s emphasis on individualized analysis could make it far less likely that a worker could get a class or collective action certified. For instance, the Administrator emphasizes that the impact of a lack of permanence in a relationship with a principal will support a finding that a worker if, but only if, that lack of permanence results from the worker’s business initiative; so one temporary worker could be an employee, while another temp retained for the same period of time could be an independent contractor. Similarly, with respect to the control factor, in the Administrator’s view, it is irrelevant that a worker had the right or ability to control the manner or means of completing his tasks; the relevant question is whether a particular worker exercised that right.

If, in fact, such individualized assessments are key, every alleged employer faced with a putative class or collective action will have a ready-made opposition to certification. If – as is often the case in wage and hour litigation – the potential damages available to any single individual are relatively low, he or she will have difficulty obtaining counsel if certification is unlikely, meaning that even meritorious claims will not be brought.

In addition, workers in creative industries may prefer to be classified as independent contractors because of the far greater likelihood that they will be held to own the copyright of any works created in the course of their work. Any copyrightable work created by an employee in the course of her employment belongs to the employer, whereas works created by an independent contractor are only works made “for hire” if agreed to in writing, and if the work falls into one of nine specific categories. Thus, workers engaged in creative endeavors may value ownership of their works far more than they would value being paid time-and-a-half for overtime. Under the Administrator’s approach, fewer workers could be classified as independent contractors, even if they currently believe themselves to be so classified.

Finally, it is impracticable to have a system in which the same worker could be an employee entitled to overtime compensation but an independent contractor for purposes of anti-discrimination laws and taxation. A unified approach to worker classification that takes into account the modern workforce is desirable – but the Administrator’s approach leaves much to be desired.

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