Employers should take immediate action to ensure that they are properly classifying their workers in light of new guidance released on July 15, 2015, by the U.S. Department of Labor (DOL).  In its Administrative Interpretation guidance letter, the DOL declares that “most workers are employees,” regardless of whether a business considers them independent contractors.  The DOL says that this new guidance gives businesses “fair notice” that the DOL is increasing investigations into and litigation against businesses utilizing independent contractors.

Businesses should take note because the DOL recently armed 19 states with a $10.2 million grant to cast a wider net in targeting businesses that it believes may be misclassifying workers, increasing the risk that these businesses may find themselves ensnared in cumbersome investigations and faced with hefty assessments or fines.  In addition, the DOL and 22 states have agreed to pool federal and state resources to expand misclassification investigations.

New Guidance Strengthens DOL’s Mandate

In its July 15th Administrative Interpretation letter, the DOL states that it will determine a worker’s status under the Fair Labor Standards Act (FLSA) by applying the six-factor “economic realities” test used by some courts. [1]  Although the test consists of a fixed number of factors, the letter stresses the test’s broadness and warns against a mechanical application of these factors.  In practice, the test’s expansive scope provides the DOL and state agencies with a capacious analytical framework, which may motivate government agencies in cash-strapped states to find even more instances of misclassification than in the past.  However, a recent U.S. Supreme Court decision may undercut investigations brought under the auspices of the guidance letter if a party demonstrates that this interpretation of the FLSA lacks “consistency” with prior DOL interpretations.[2]

Increased Misclassification Investigations and Lawsuits

On the same date that the DOL released its interpretation guidance letter, the DOL also announced that it had levied $135,000 in fines against a single company related to alleged worker misclassification.  Since January 1, 2015, the DOL has announced misclassification investigations that resulted in fines ranging from $108,000 to $7.9 million, spanning the construction, plumbing and heating, restaurant and dining, hospitality, telemarketing and janitorial industries.  However, not all investigations are meritorious.  A federal appellate court recently overturned a $6 million fine levied by the DOL and awarded attorneys’ fees to the target company after finding that the DOL investigator acted in “bad faith” by bringing a frivolous misclassification claim.[3]

Workers Are Also Taking Aim at Businesses

In addition to increased federal and state investigations, misclassification lawsuits against businesses are on the rise, sometimes producing significant results.  On June 12, 2015, a large shipping and delivery company announced a $228 million settlement with more than 2,000 current and former California-based workers in the wake of the U.S. Court of Appeals for the Ninth Circuit ruling that these workers had been misclassified as independent contractors.  Workers have also filed multiple class action lawsuits against popular ride-sharing companies, alleging that these companies are misclassifying their drivers as independent contractors.

Potential Effects on Business Growth

Businesses operating in many industries, including app-driven “services on demand” companies, may face increased investigations by either federal or state agencies.  At the same time, rapidly growing businesses need to be agile and able to act swiftly to take advantage of opportunities while also control costs when resources are limited.  These competing interests may drive businesses to engage independent contractors rather than employees.  Businesses that have chosen to engage the services of a contractor should consult with legal counsel to ensure that their engagements are compliant with federal, state and local laws governing worker classification and that short-term decisions do not create unnecessary long term risks.  For more information or questions concerning these developing issues, please contact experienced counsel.

© 2015 Perkins Coie LLP

[1] The six factors outlined by DOL are: (1) is the work an integral part of the employer’s business, (2) does the worker’s managerial skill affect the worker’s opportunity for profit and loss, (3) how does the worker’s relative investment compare to the employer’s investment, (4) does the work performed require special skill and initiative, (5) is the relationship between the worker and the employer permanent or indefinite, and (6) what is the nature and degree of the employer’s control.

[2] See Young v. United Parcel Serv., Inc., No. 12-1226, 575 U.S. ___, 135 S. Ct. 1338, 1342 (2015).

[3] See Gate Guard Servs., L.P. v. Perez, --- F.3d ---, 2015 WL 4072105 at *9 (5th Cir. July 2, 2015).