In this first edition of The GovCon Bulletin,™ we review an administrative interpretation issued earlier this year by the U.S. Department of Labor (DOL) on the classification of workers as independent contractors or employees, since this issue has unique relevance to federal government contractors.
In July, the U.S. Department of Labor (DOL) issued an administrative interpretation providing guidance for distinguishing employees from independent contractors for purposes of the Fair Labor Standards Act (FLSA). Setting aside the potentially steep penalties and liabilities under the FLSA that can arise from improper classifications, a company’s classification of its workers invariably has direct implications on contract budgeting and bidding. Although under the Davis Bacon and Related Acts, government contractors and subcontractors under certain public contracts already are required to meet prevailing wage requirements regardless of whether workers are employees or independent contractors, the classification of workers as employees or independent contractors can have significant cost implications under other contracts in light of the minimum protections, wages and benefits that employees are entitled to under the web of federal wage, benefit and employment laws. Indeed, as we noted in an earlier Bulletin (see here), in the foreseeable future government contractors will be required to offer paid sick leave to their employees.
The Economic Realities Factors
In its administrative interpretation, DOL elaborates on the framework to be used when assessing if a worker is an independent contractor or an employee. As DOL explains, the focus of the six-factor “economic realities” test is whether the worker is economically dependent on the employer (and thus an employee) or whether the worker is really in business for him or herself (and thus an independent contractor). We note at the outset a conclusion drawn by DOL early in the administrative interpretation: namely that, in DOL’s view, under the “economic realities” test to be applied in making this determination, “most workers are employees under the FLSA.”
As to the factors themselves, DOL cautions employers that there should not be an over-reliance on any one factor and the independent contractor-employee issue should not be resolved simply by tallying which factors are met or applying the six factors mechanically as a checklist.
Factor 1. Is the Work an Integral Part of the Employer’s Business?
The first factor looks at whether the work performed by a worker is integral to the employing company’s business. If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer. A true independent contractor’s work, on the other hand, is unlikely to be integral to the employer’s business. DOL advises that work can be integral even if it is just one component of a business, is performed by hundreds or thousands of workers, or is performed away from the employer’s premises.
In DOL’s examples, a worker answering calls at a call center with hundreds of other workers is still performing work integral to a call center’s business. Likewise, a carpenter is integral to a residential construction company’s business, but a software developer hired to create bidding and scheduling software for the construction company is not.
Factor 2. Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?
The second factor focuses on the impact that a worker’s managerial skill has on his or her opportunity to profit and loss. According to DOL, a worker in business for himself or herself faces the possibility to not only make a profit, but also to experience a loss. However, this opportunity should be related to the worker’s managerial skills as opposed to the worker’s ability to work more hours or do a job well, since the latter factors also impact an independent contractor’s earnings and don’t distinguish independent contractors from employees. For example, a worker’s decision to hire others, purchase materials and equipment, rent space, and advertise reflect management that impact overall earnings.
In DOL’s examples, a cleaning worker who performs only on assignments determined by a cleaning company and who does not advertise, solicit additional work from other clients, or try to reduce costs, but only agrees to work more hours to earn more, does not exercise managerial skills that impact his or her profit or loss. In contrast, a cleaning worker who advertises, negotiates contracts, decides which jobs to perform and when to perform them, decides to hire helpers, and recruits new clients exercises the managerial skills affecting opportunity for profit and loss that are indicative of an independent contractor.
Factor 3. How Does the Worker’s Relative Investment Compare to the Employer’s Investment?
The third factor examined by DOL is the extent and nature of a worker’s investment in his or her business. According to DOL, a worker must make some investment in a business, beyond an investment in any particular job, in order for there to be an indication that he or she is an independent contractor. Examples of such investments include funding a company’s capacity to expand, to extend market reach, or to reduce cost structure. However, DOL warns that even if a worker makes an investment, it should not be considered in isolation and that it is the relative investment of the worker in comparison to that of the employer that matters. Thus, an investment of a worker in his or her own tools alone is not a capital expenditure or business investment that indicates the worker is an independent contractor. A relatively minor investment of a worker compared to the investments by the employer suggest that the worker is economically dependent on the employer and not independent.
In setting forth examples, DOL turns again to scenarios involving cleaning services. An occasional occurrence of a worker bringing his or her own supplies to a job is not an indication of independent contractor status when compared to a local cleaning company’s investment in insurance, supplies and a vehicle, particularly in light of the relatively small investment by the worker in supplies that do not further the business beyond a particular job. On the other hand a cleaning worker that sometimes works for a local cleaning company, but otherwise receives referrals makes the type and level of investments that may be indicative of an independent contractor when the worker: invests in a vehicle used to travel to worksites that is not suitable for personal use, rents his or her own space to store the vehicle and supplies, advertises and markets his or her services and hires a helper for larger jobs, regularly purchases material and equipment to provide cleaning services, and brings his or her own equipment and cleaning supplies to each worksite.
Factor 4. Does the Work Performed Require Business Skill and Initiative?
A fourth factor examined by DOL is not so much a factor as it is a contention. Specifically, DOL refutes the notion that technical skills, even if they are specialized, indicate that a worker is in business for himself or herself. Rather, a worker’s business skills, judgment, and initiative will aid in determining whether the worker is economically independent.
DOL contrasts a highly skilled carpenter who provides services for a construction firm but does not make independent judgments on the job site beyond the work he is doing and who is told what work to perform where, with a highly skilled carpenter who provides a specialized service for a variety of construction companies, markets his services, determines when to order materials and the quantity of materials to order, and determines which orders to fill. According to DOL, in the former scenario, the carpenter does not demonstrate the business skill and initiative of an independent contractor, while in the latter scenario, the carpenter does.
Factor 5. Is the Relationship between the Worker and the Employer Permanent or Indefinite?
The fifth factor examined by DOL is the permanency or indefiniteness of the relationship between the worker and the company. According to DOL, a relationship in which the tenure or duration is permanent or indefinite suggests the worker is an employee, since workers in business for themselves will have a tendency to seek independence from any particular company and typically work discreet projects that are not continuous or repeated. A lack of permanence or indefiniteness, however, does not automatically suggest an independent contractor relationship, and the reason for the lack of permanence or indefiniteness should be carefully reviewed to determine if the reason is indicative of the worker’s running an independent business.
In DOL’s example, a scenario in which an editor has worked for an established publishing house for several years, edits only in accordance with the publishing house’s specifications, uses its software and only edits books provided by the publishing house is indicative of the kind of permanence found in a employment relationship. In contrast, a scenario in which an editor has worked intermittently with fifteen different publishing houses over several years, markets her services to numerous publishing houses, negotiates rates for each editing job, turns down work for any reason, including because she is too busy with other editing jobs, is indicative of a lack of permanence typical of an independent contractor relationship.
Factor 6. What is the Nature and Degree of the Employer’s Control?
The final factor examined by DOL is the nature and degree of the employer’s control over the worker. DOL advises that to be viewed as an independent businessperson, rather than as an economically dependent employee, a worker must control meaningful aspects of the work performed, and that control must be more than theoretical—the worker must actually exercise it. DOL cautions, however, that an employer’s lack of control or direct supervision over workers who work at home or offsite is not telling or unsurprising; likewise, workers’ control over the hours when they work is not indicative of independent contractor status.
DOL also warns that arguments about regulatory requirements, the need to maintain customer satisfaction or the nature of the business, will not, in DOL’s view, support a company’s decision to engage workers not as employees yet maintain stringent control using technological advances and enhanced monitoring mechanisms over aspects of the workers’ jobs, schedules, dress, and tasks. Rather, according to DOL, the nature and degree of the employer’s control should be examined as part of determining the ultimate question whether the worker is economically dependent on the employer.
Lastly, DOL instructs that the “control” factor should not play an oversized role in the analysis of whether a worker is an employee or an independent contractor, and that all possibly relevant factors should be considered. Rather the control factor, like the other factors, should be analyzed in the context of ultimately determining whether the worker is economically dependent on the employer or an independent business.
In its final set of examples, DOL describes a scenario in which a registered nurse provided skilled nursing care in nursing homes and was listed with a registry in order to be matched with clients. In this first scenario, the registry interviewed the nurse prior to her joining the registry, required the nurse to undergo a multi-day training presented by the registry, sent the nurse a listing each week with potential clients, and required the nurse to fill out a form prior to contacting any clients. The registry also required that the nurse to adhere to a certain wage range and restricted the nurse from working weekend hours. The nurse in the scenario was required to inform the registry if she was hired by a client and to contact the registry if she intended to miss scheduled work with any client. According to DOL, the degree of control exercised by the registry in this first scenario is indicative of an employment relationship. In contrast, in DOL’s second scenario, a registered nurse provided skilled nursing care in nursing homes and was listed with a registry in order to be matched with clients. The registry sent the nurse a listing each week with potential clients, but the nurse was free to call as many or as few potential clients as she wished and to work for as many or as few as she wished. The nurse also negotiated her own wage rate and schedule with the client. In this second scenario, DOL concluded that the degree of control exercised by the registry is not indicative of an employment relationship.
Although DOL’s admonitions against an over-reliance on any particular factor hints at flexibility, if not uncertainty, its conclusion that “most workers are employees under the FLSA,” leaves little doubt where it believes most companies that employ daily workers should end up, after all is said and done. While some have commented this remark does not signal a significant shift in DOL policy - and perhaps it does not since the administrative interpretation is largely a compendium of prevailing federal cases that have addressed the issue - the conclusion does very clearly draw a line in the sand that DOL seems to be prepared to stand behind. Challenges to DOL’s administrative interpretation are likely to come. Nevertheless, government contractors that are considering hiring independent contractors or that currently work with independent contractors should, if they have not done so, examine those relationships in light of DOL's administrative interpretation and DOL’s very apparent posture.