The U.S. Department of Labor has just released a dozen Q&A’s on the issue of IC misclassification in an online publication it calls “Misclassification Mythbusters.” The 12 IC misclassification “myths” that it seeks to debunk are intended to educate workers about their status as ICs and to foster the Labor Department’s continued crackdown on misclassification of employees as independent contractors. Yet, a close review of the answers given by the Labor Department as “mythbusters” reveals that this new federal publication contains some misinformation about the subject.
The first myth is: “If I am an independent contractor under one law, I am an independent contractor under other laws.” The DOL correctly notes that “Even if you are a legitimate independent contractor under one law, you may still be an employee under other laws.” This is one of the most vexing aspects of IC classification, and confounds both workers and businesses. In an effort to try to help educate the public, the Labor Department recites the tests for IC status under various federal and state laws. Regrettably, though, it does not characterize some of those tests in an accurate manner. For example, the DOL mischaracterizes state unemployment insurance law when it says:
“Each state UI law presumes a worker is an employee unless certain tests in each state’s UI law are passed to show that the worker is an independent contractor. The tests in each state differ slightly; however, the tests generally examine the direction and control exercised by the employer over the service performed and whether the worker is customarily engaged in an independent business.”
While some state unemployment laws presume a worker is an employee, not all states have IC tests that start out with a presumption that every worker is an employee. Further, the tests under the unemployment laws in many states do not “differ slightly” from another. Rather, the tests for IC status under many state unemployment laws differ dramatically from each other. Some states use the IRS test; others use the common law test; a number use a three-factor ABC test; some ABC tests are interpreted quite differently by the courts in one state than another; a few states have tests with close to a dozen factors; and still other states use the FLSA’s economic realities test. For this reason, state IC tests have been referred to as a “crazy quilt” of laws.
PUBLISHER’S NOTE (9/8/16): FOLLOWING THE PUBLICATION OF THIS BLOG POST, THE DEPARTMENT OF LABOR ELIMINATED THIS MISCHARACTERIZATION OF STATE UNEMPLOYMENT LAWS. THE NEW “MISCLASSIFICATION MYTHBUSTERS” SITE BY THE LABOR DEPARTMENT MORE APPROPRIATELY STATES: “Most state laws contain strict tests to determine whether there is sufficient absence of control by an employer that the worker is not an employee but an independent contractor.”
Of the next 11 myths, at least six are afflicted by a recurring inaccuracy. For example, Myth #3 says: “I received a 1099 tax form from my employer, and this makes me an independent contractor.” The Labor Department seeks to debunk this myth by stating that “Receiving a 1099 does not make you an independent contractor under the FLSA.” No one would reasonably argue that the mere issuance or receipt of a Form 1099 tax form means that a worker is an IC as a matter of law, including the FLSA. But the DOL goes far afield when it next states: “Under the FLSA, you are an employee if your work indicates you are economically dependent on an employer.” (Emphasis added.) This statement wholly mischaracterizes the law because it erroneously suggests that the test for IC status under the FLSA is a one-factor test – that is, if the worker is economically dependent on a business, the worker is an employee under the FLSA.
The courts, though, have stated that there is no single factor that is determinative of whether an individual is an employee or independent contractor for purposes of the FLSA – and it is the courts that determine IC status under the FLSA, not the Labor Department. The courts have held that the totality of the working relationship must be examined. This means that all facts relevant to the relationship between the worker and the business must be considered, not simply economic dependence, in determining a worker’s status. Merely because an otherwise legitimate IC chooses to provide services to only one business does not automatically turn an otherwise legitimate IC into an employee, especially when the IC has the right to provide services to more than one company.
This erroneous statement by the DOL that IC status under the FLSA is essentially a one-factor test is then repeated verbatim by the Labor Department in five other myths. (See Myth # 5, #7, #8, #11, and #12.) Thus, together with the errors noted in Myth #1, over half of the “mythbusters” contain misleading information. Hopefully, the DOL will take note and remediate these misleading statements.
PUBLISHER’S NOTE (9/8/16): AS NOTED ABOVE, FOLLOWING THE PUBLICATION OF THIS BLOG POST, THE DOL DID IN FACT TAKE NOTE OF ITS MISLEADING STATEMENTS, CHANGING APPROPRIATELY THE DESCRIPTION OF THE IC TEST UNDER STATE UNEMPLOYMENT LAWS. THE DEPARTMENT OF LABOR ALSO CHANGED THE MISLEADING LANGUAGE IN SEVEN OF THE OTHER MYTHS. THE DOL SITE NOW SAYS THE FOLLOWING ABOUT THE TEST FOR IC STATUS UNDER THE FLSA: “Under the FLSA, you are an employee if, as a matter of economic reality, your work indicates that you are economically dependent on an employer.” THIS CHANGE, HOWEVER, DOES NOT REMOVE THE MISCHARACTERIZATION OF THE LAW THAT THE TEST FOR IC STATUS UNDER THE FLSA IS A ONE-FACTOR TEST. UNFORTUNATELY, THE DOL SITE STILL REFLECTS A MISUNDERSTANDING OF CURRENT FLSA LAW BY THE COURTS, WHICH HAVE STATED THAT NO ONE FACTOR IS DETERMINATIVE OF IC STATUS, ALTHOUGH GREATER WEIGHT IS GIVEN TO WHETHER AN EMPLOYEE IS ECONOMICALLY DEPENDENT ON THE PARTY RECEIVING HIS/HER SERVICES.”
“Misclassification Mythbusters” follows by a year the issuance of an Interpretation by the Administrator of the Wage and Hour Division dealing with IC misclassification. In July 2015, Dr. David Weil, the newly appointed Administrator of the Wage and Hour Division, issued an Administrator’s Interpretation that, like the “Misclassification Mythbusters” publication, failed to acknowledge (other than in a few obscure footnotes) that the test for IC status under the FLSA requires and permits an examination of many factors and not just a few. As I noted in my blog post on the Interpretation, while the Administrator acknowledges that legitimate independent contractor relationships “can be advantageous for workers and businesses,” he did not address the fact that a substantial amount of IC misclassification is not the result of an intention to violate federal or state law, but rather unintentional acts by businesses who are perplexed by the very first myth: that even if a worker is an IC under one law, he or she may be an employee under another law with a different test for IC status.
What can those companies do to enhance their IC compliance under an array of differing federal laws and this crazy quilt of state IC laws? As more fully described in my White Paper on “How Companies Can Minimize the Risks of Independent Contractor Misclassification,” businesses have three alternatives to mitigate their risk of misclassification liability: (1) restructuring, re-documenting and re-implementing their independent contractor relationships in a manner that enhances compliance with governing laws; (2) reclassifying their independent contractors; or (3) redistributing them to staffing or workforce management firms or other third-party vendors.
Businesses that wish to maintain an independent contractor model can use a process such as IC Diagnostics™ to restructure, re-document and re-implement. This tool assesses dozens of factors that courts and administrative agencies have identified as being pertinent to a determination of independent contractor status. The process results in a practical, customized and sustainable way to enhance independent contractor compliance, not only with the FLSA and other federal laws but also with the array of differing state laws.
Written by Richard Reibstein.