Capitol Hill

In the current economy where workloads and jobs are fluid, independent contractors have become common in the construction industry. However, federal regulators and others believe some employers are misclassifying employees as independent contractors.

To combat misclassification by employers, the Department of Labor's (DOL's) Wage and Hour Division released an Administrator's Interpretation (AI) to help establish who is considered an employee versus independent contractor. This interpretation of existing law is an effort to protect workers who do not enjoy the same 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.

What is an AI?

An AI is not a change in policy; therefore, it is not subject to the notice and comment process required for new regulations. It does not have the force of law, but courts look favorably upon interpretations such as this AI by federal agencies.

The AI issued July 15 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." The AI does not outline additional factors to be used when assessing a worker's status. It states no single economic reality factor should be the determining factor but, rather, factors should be looked at collectively. Under the new guidance, it will be far more difficult for employers to classify workers as independent contractors.

The ultimate determining factor under the FLSA is whether a worker economically depends on an employer or truly is in business for himself or herself. 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, a worker is an independent contractor.

Economic realities test

To determine whether a worker is an employee or independent contractor, the economic realities test considers the following factors:

• Integral to the business. 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 focus here lies on how a worker's managerial skills can affect his or her profit or loss.
• Relative investment. The worker should make some investment and, therefore, undertake some risk to be considered an independent contractor.
• Skill and initiative. The AI specifically mentions only construction workers who operate as independent businesses as opposed to being economically dependent on employers are considered independent contractors.
• Permanency of relationship. If a worker is permanently tied to a 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 worker returned from season to season but whether the worker worked for the entire operative period of the season."
• Degree of control. An employer does not need to be looking over a worker's shoulder every day to exercise control. Also, dictating hours to be worked is largely insignificant.

Flatly stated in the AI conclusion: "Most workers are employees under the FLSA's broad definitions." The AI squarely focuses on workers being in business for themselves and not economically dependent on employers. Some employers have forced workers to set up their own companies to classify them as independent contractors. The guidance aims to address these types of arrangements.

Be mindful

DOL has been clear it is aggressively 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. It also could lead to violations of the FLSA, Family and Medical Leave Act and other statutes that protect workers.

If you use independent contractors, examine the AI and review the nature of your relationships with workers to be clear you are in compliance.

Andrew Felz is NRCA's manager of federal affairs.

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• DOL's misclassification information