Department of Labor’s Guidance on Independent Contractors Raises Concerns

Posted on Jul 24, 2015

There has recently been more and more litigation involving the misclassification of workers as independent contractors rather than employees. Also, the Department of Labor (“DOL”) has been focused on reducing the occasions when workers may properly be classified as independent contractors rather than employees. As explained by the DOL, by misclassifying workers as independent contractors instead of employees, the workers do not receive overtime pay and “other important workplace protections” which they would otherwise receive if classified as employees.

The DOL’s recently issued “Administrator’s Interpretation” is consistent with the DOL’s intent to give a more expansive application to the Fair Labor Standards Act’s (“FLSA”) definition of employee. In particular, the DOL notes that the FLSA is meant to be interpreted broadly in favor of coverage, e.g., employee status. Consequently, the FLSA’s language that an employee is someone employed by an employer, and that to employ means to “to suffer or permit” someone to work, provides the foundation for the DOL to expand the occasions when a worker will be considered an employee rather than an independent contractor.

Notably, the Administrator’s Interpretation was issued just two weeks after the Fifth Circuit, which has appellate jurisdiction over district courts in Texas and Louisiana, approved enhanced attorneys’ fees against the DOL for its bad faith during its investigation and litigation of a misclassification case. In the case, the DOL argued that individuals who use their mobile trailer homes to provide gate guard services, primarily at oil well drilling sites, were employees and not independent contractors. Applying Fifth Circuit analysis of independent contractor status, the trial court found otherwise, and noted evidence that the federal government hires similar workers to do similar work and classifies them as independent contractors as well.

The DOL did not appeal the district court’s determination that the gate guards in the case were independent contractors. Arguably, the Fifth Circuit uses an analysis that results in a broader application of independent contractor status, and an affirmative ruling by Fifth Circuit on the issue may have greater precedential value with other courts than the Administrator’s Interpretation. Given the timing and the substance of the Interpretation, the Administrator’s Interpretation may be seen as an attempt to minimize the effect of the gate guard case and indirectly influence the Fifth Circuit’s, and other courts’, independent contractor analysis.

As a backdrop, to determine a worker’s independent contractor status, the Fifth Circuit generally considers, as a non-exhaustive list:

(1) the degree of control exercised by the alleged employer;
(2) the worker’s investments in the enterprise;
(3) the worker’s opportunity for profit or loss;
(4) the skill and initiative required in performing the job; and
(5) the permanency of the relationship.

The test advanced in the Administrator’s Interpretation adds to the list consideration of whether the work being performed is an integral part of the employer’s business and redirects the focus of other factors.

Work Integral to the Business: Under the DOL’s test, if the service provided is an integral part of the employer’s business, then it will almost always result in an employee relationship. Although the Administrator’s Interpretation recites that no one factor is determinative in resolving the employee/independent contractor issue, the DOL also states “that the ‘integral’ factor particularly encompasses the [FLSA’s] ‘suffer or permit’ standard.” Therefore, if the service is a necessary or integral part of the employer’s services or product, this factor will strongly (perhaps always) suggest an employee relationship. The Administrator’s Interpretation directly acknowledges that this is not a factor currently considered by the Fifth Circuit in its independent contractor analysis.

Profit or Loss: The DOL’s analysis of the opportunity for profit or loss focuses on the worker’s managerial skills in running his/her business, as opposed to being efficient and able to do more work (and receive greater rewards) in a certain amount of time. As explained by the DOL, a worker who is able to be efficient and to complete more jobs during the day/week is only showing efficiency in work, the same as any employee.

Investment: Rather than focusing on the worker’s personal investment and whether it is substantial for the individual or demonstrates a significant undertaking by the worker, the DOL’s standard requires a comparison between the amount of investment made by the worker in his/her “business” and the overall investment of the employer in its business operations, not just the employer’s investment in the services in issue. As an example, the Administrator’s Interpretation cites to rig welders with an investment of $40,000 in their rigs and equipment and depicts that investment as being minor when compared to the “hundreds of thousands of dollars of [other owner] equipment at each site.”

Skills and Initiative: For this factor, the DOL changes the focus from the worker’s specialized expertise that makes the worker marketable as an independent contractor to the worker’s “business skills, judgment, and initiative.” How an employer will determine this is simply not explained. Arguably, if a person demonstrates “good” business judgment and initiative, this factor would support a conclusion of independent contractor status, but if the person has poor business judgment, it would not.

Control of the Work: Under the DOL’s analysis, to be an independent contractor, the worker must control “meaningful aspects of the work,” regardless of the actual control asserted by of the employer. Further, if the employer must assert control due to regulatory requirements, etc., such control “indicates the worker is an employee.” Consequently, employers in highly regulated industries may be affected by future consideration of this factor.

The Administrator’s Interpretation is not binding on any court, but is entitled to some deference. Consequently, its impact on future cases is unclear. Nevertheless, it does announce the DOL’s internal guidance and how it will approach independent contractor issues when dealing with employers in the future.

Of course, this is not an exhaustive discussion of the law applicable to these issues. For more information on this topic, please email Sandra White, Labor & Employment Lawyer with BRANSCOMB|PC. Her contact information is or (210) 598-5400.