On June 15, 2015, the United States Department of Labor (DOL) issued interpretive guidance to assist employers in correctly classifying workers with the goal of ultimately “curtailing misclassification.”

While the guidance does not set any new standards, it does provide helpful information regarding how the DOL determines whether a worker is, in fact, an independent contractor under the Fair Labor Standards Act (FLSA), and therefore, exempt from certain minimum wage, overtime, unemployment, and workers’ compensation laws.

According to the DOL, it’s not just a Magic 8-ball test

Notably, in the guidance, the DOL makes it clear that—in its opinion—most workers will be classified as employees. This is key for employers that utilize independent contractors. It is no secret that the DOL will operate under the presumption that a worker is an employee, and the onus is on the employer to prove otherwise.

Therefore, employers should be prepared to present sufficient evidence to justify any worker’s classification as an independent contractor. Keep in mind that the DOL is not concerned with labels. According to the guidance, it is well aware that employees are often mislabeled “independent contractors,” “owners,” “partners,” or “members of a limited liability company” in order to circumvent the law.

The DOL outlines that, in order to make the determination of proper classification, it utilizes the “economic realities test,” which considers the following factors:

1. Whether the work is an integral part of the employer’s business.
2. Whether the worker’s managerial skill affects the worker’s opportunity for profit or loss.
3. How does the worker’s relative investment compare to the employer’s investment?
4. Whether the work performed requires special skill and initiative.
5. Whether the relationship between the worker and the employer is permanent or indefinite.
6. What is the nature and degree of the employer’s control?

No single factor is dispositive under this test.

The guidance stresses that employers should not be over reliant on the last factor, the amount of control exerted over the employee. Instead, all possibly relevant factors should be considered.

Indeed, the inquiry should be focused on whether the worker is economically dependent on the employer or the worker’s independent business. This can prove to be problematic for employers.

Often, companies believe that, because they exert little control over the worker’s activities, (for instance, the worker is not directly supervised, such as an overnight cleaning person), they are automatically correct in not classifying a worker as an employee.

The DOL provides straight-forward examples of how each factor may or may not indicate independent contractor status. Employers are encouraged to review them in order to become familiar with the DOL’s analysis.

Take away—ignorance is NOT bliss!

By providing guidance regarding its position, the DOL is simultaneously sending an important message: The agency is making an attempt to ensure that employers are well-informed about their obligations. Independent contractor misclassification has been on top of the DOL’s priorities, with the 2015 fiscal year budget specifically allocating $14 million to be used to combat misclassification.

In addition to the coordinated information-sharing with various states, the DOL has also committed to working closely with the U.S. Department of the Treasury to conduct targeted wage and hour investigations in industries with the “most substantial” independent contractor abuses.

Ignorance of the law will certainly not be a defense. Employers are reminded that with increased federal and state enforcement efforts, along with the rise in lawsuits challenging employee misclassification and other FLSA violations, they should closely review their independent contractor relationships.

Employers may need to consider reclassifying their workers, or in the alternative, updating their agreements. Otherwise, employee misclassification can turn into an expensive nightmare for employers.