The Wage and Hour Division is tackling employee misclassification because so much depends upon the answer to that question.
Imagine working as a drywall installer building houses as an employee one day, but the next day, while performing the same work on the same site for the same company, you’re told you are now considered an independent contractor. You didn’t suddenly open a business of your own. Nothing about your work changed. But now, you’re told that since you’re no longer an employee, you’re no longer eligible for overtime pay, unemployment insurance, worker’s compensation or a host of other benefits that come with employee status.
That really happened to a group of workers recently, who we discovered were owed back wages after conducting an investigation. And unfortunately, this situation is all too common − with terrible consequences. Misclassified employees are often denied access to the critical benefits and protections they are entitled. Misclassification also generates substantial losses to the federal government and state governments in the form of lower tax revenues, as well as to state unemployment insurance and workers’ compensation funds. It forces workers to pay the entirety of their payroll (FICA) tax. It also tips the scales against all of the employers who play by the rules and undermines the economy.
In recent years, employers have increasingly contracted out or otherwise shed activities to be performed by other entities through, for example, the use of subcontractors, temporary agencies, labor brokers, franchising, licensing and third-party management. Among the many consequences of these “fissured workplaces,” misclassifying employees as independent contractors is among the most damaging to workers and our economy.
Whether a worker is an employee under the Fair Labor Standards Act is a legal question determined by the economic realities of the working relationship between the employer and the worker, not by job title or any agreement that the parties may make. The Labor Department supports the use of legitimate independent contractors − who play an important role in our economy − but when employers deliberately misclassify employees in an attempt to cut costs, everyone loses.
The Wage and Hour Division continues to attack this problem head on through a combination of a robust education and outreach campaign, and nationwide, data-driven strategic enforcement across industries.
We also will continue to work with the IRS and 22 states on this issue in a variety of ways – through, for example, information sharing and coordinated enforcement.
Clarity for Employers
As fissuring and misclassification have spread, providing workers and employers a clear understanding of what makes a worker an employee may be more important now than ever. Accordingly, we have issued an administrator’s interpretation that analyzes how the Fair Labor Standards Act’s definition of “employ” guides the determination of whether workers are employees or independent contractors under the law. It discusses the breadth of the FLSA’s definition of “employ,” and provides guidance on the “economic realities” factors applied by courts in determining if a worker is indeed an employee.
Ultimately, the goal of the economic realities test is to determine whether a worker is economically dependent on the employer (and is therefore an employee) or is really in business for him or herself (and is therefore an independent contractor). We believe in providing employers all of the information that they need to comply, and this document, with its discussion of the relevant law and inclusion of numerous examples, will help employers.
Our goal is always to strive toward workplaces with decreased misclassification, increased compliance, and more workers receiving a fair day’s pay for a fair day’s work.
Dr. David Weil is the administrator for the U.S. Department of Labor’s Wage and Hour Division