A little over a week after issuing its Notice of Rulemaking that will result in more than doubling the minimum salary that must be paid to an employee for them to be eligible for the administrative or executive exemption from the overtime pay requirements of the Fair Labor Standards Act (“FLSA”)(click here for my blog post on this subject), the Administrator of the Wage and Hour Division of the U.S. Department of Labor (“USDOL”) issued an Administrator’s Interpretation that focused on what workers would be considered employees for purposes of coverage by the FLSA. In essence, the USDOL will now consider any worker who is “economically dependent” on their employer to be an employee, regardless of what label the employer and worker have placed on their relationship. The main target of this Administrator’s Interpretation is those workers who are being treated by their employers as independent contractors.
That Interpretation discusses the six factors that will be used by the USDOL to decide whether a worker is “economically dependent” on their employer. Although not identical, those six factors are very similar to the factors used by the IRS to make the same determination for tax purposes. What can happen to an employer if the IRS determines that a worker it has treated as an independent contractor is really an employee is discussed in an article that I wrote about this subject for an IIAG publication. That article also applies the IRS factors to a typical agency/producer relationship to see what the likely outcome would be if an agency attempted to treat its producers as independent contractors. The result was not a good one for the agency.
The same result is likely using the six factors identified in the USDOL Administrator’s Interpretation, especially since throughout that Interpretation the statement is made that no one of those six factors is more important than the other and they are not to be mechanically applied (i.e., a majority of them one way or the other will not necessarily answer the question). Instead, the focus will stay on whether the worker in question is “economically dependent” on their employer. The Interpretation analyzes the six factors in some detail and gives examples of how they would indicate employee or independent contractor status.
My take on this analysis is that if a worker performs services for only one employer and does not incur significant expenses in doing so for which there is no reimbursement from the employer, the USDOL will consider that worker to be an employee for purposes of the FLSA and thus, entitled to overtime pay for any hours worked in excess of 40 in any one work week, unless they qualify for an exemption. The employer in that situation would be faced with having to pay overtime for any excess hours worked during the previous three years and unless the employer had kept track of the number of hours worked by the “independent contractor”, it would be stuck with whatever number the worker provided.
In addition, as part of its misclassification initiative, the USDOL would report its finding to the IRS and the taxing authorities of those states with which it has memorandums of understanding for action by them. Fortunately for Georgia employers, the USDOL does not have a memorandum of understanding with the Georgia Department of Revenue, at least not yet. Agency and other business owners should carefully review the Administrator’s Interpretation to make sure that any independent contractor relationships they may have will pass the test of economic independence.