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DOL leads firms to evaluate independent contractors

DOL leads firms to evaluate independent contractors

Employers are being advised to re-examine how they classify workers as either employees or independent contractors, in light of guidance on the issue released by the U.S. Department of Labor last week.

Experts say that while there was nothing dramatically new in the administrative interpretation, it serves as a warning of the agency's commitment to pursuing misclassification cases and provides additional guidance.

“Businesses and employers are going to take a much closer look at their contractor classifications, knowing that it's going to be a priority on the federal level” and that it will impact how they look at their long-term independent contractor relationships, said Allan S. Bloom, a partner with law firm Proskauer Rose L.L.P. in New York.

“If a company suspects it has a classification problem, they should reach out to labor counsel before doing anything and get appropriate opinions and advice on the steps to take,” said Jennifer L. Anderson, a partner with law firm Jones Walker L.L.P. in Baton Rouge, Louisiana. “Avoid the knee-jerk reaction. That can sometimes create more problems than doing nothing.”

An increasing number of workplaces are misclassifying employees as independent contractors, according to the guidance issued by Labor Department Wage and Hour Division administrator David Weil.

Mr. Weil said some employees are being intentionally misclassified as a means to cut costs and avoid compliance with labor laws.

The guidance says employers should use the Fair Labor Standards Act's definition of employ as “to suffer and permit to work” in applying an “economic realities test” in determining whether workers are employees.

According to the guidance, factors to be considered under this test, which is now being used by courts to evaluate this issue, are:

• The extent to which the work performance is an integral part of the employer's business

• The worker's opportunity for profit or loss depending on his or her managerial skill

• The extent of the relative investments of the employer and the worker

• Whether the work performed requires special skills and initiatives

• The permanency of the relationship

• The degree of control exercised or retained by the employee.

“The guidance can be categorized as not necessarily totally new, but as pushing the interpretation of court decisions to the broadest extent possible in order to obtain coverage for more workers under federal wage and hour laws,” said Matthew S. Disbrow, a partner with law firm Honigman, Miller, Schwartz and Cohn L.L.P. in Detroit.

“The guidance has gone about as far as you can take it when relying on court decisions,” Mr. Disbrow said. “The DOL believes most work should be performed by employees, so businesses should be cautioned to use independent contractors sparingly.”

“At least it's some guidance employers can come and look at in ascertaining whether or not their workers are properly classified,” said E. Jason Tremblay, a partner with Arnstein & Lehr L.L.P. in Chicago.

On a related issue, observers say the Labor Department may issue a final proposal that will change the highly litigated “white-collar exemptions” for overtime with respect to workers' duties without giving employers the opportunity to comment on the issue.

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