{"id":186,"date":"2015-07-17T17:00:07","date_gmt":"2015-07-17T17:00:07","guid":{"rendered":"http:\/\/zamzowlaw.com\/articles\/?p=186"},"modified":"2015-07-17T17:00:07","modified_gmt":"2015-07-17T17:00:07","slug":"decoded-department-of-labor-administrators-interpretation-no-2015-1","status":"publish","type":"post","link":"https:\/\/zamzowfabian.com\/articles\/decoded-department-of-labor-administrators-interpretation-no-2015-1\/","title":{"rendered":"Decoded: Department of Labor – Administrator\u2019s Interpretation No. 2015-1"},"content":{"rendered":"

Independent Contractors vs. Employees:
\n<\/u><\/strong>Brace yourself for a possible future of unfavorable rules and legislation regarding independent contractors. On July 15, 2015 the United States Department of Labor<\/em> (\u201cDOL<\/strong>\u201d), Wage and Hour Division, took an interesting step by releasing its expansive application of the \u201cSuffer or Permit<\/strong>\u201d standard found within the Fair Labor Standard\u2019s Act (\u201cFLSA<\/strong>\u201d) on the employee vs. independent contractor debate. Since the FLSA was enacted in the late 1930s, employees, employers, attorneys, and administrators have used the courts<\/em> interpretation of the FLSA to define employee and employer relationships, rather than any agency<\/em>, and this expansive administrative interpretation new to this area.<\/p>\n

The release of the administrator\u2019s interpretation may have the effect and intention of influencing Congress, the Courts, and encouraging employment lawsuits by independent contractors against employers. Before we explain how applying the suffer or permit standard<\/em> to independent contractors is so drastic, we must first explain how the suffer or permit standard has been used by courts with regards to employees and to pay or not to pay.<\/p>\n

Backgroud:<\/strong> To Suffer or Permit<\/em> (to work) is found under the definition of \u201cEmploy\u201d (FLSA 203(g)), and is thus used to classify when one is \u2018employed\u2019 (i.e. must be paid); the FLSA only applies if there is an employer\/employee relationship. In 1944 the United States Supreme Court declared employees must be paid for \u201cphysical or mental exertion controlled or required by the employer and pursued necessarily and primarily for the benefit of the employer and his business\u201d (Tennessee Coal, Iron & Railroad Co. v. Muscoda Local No<\/em>. 123, 321 U.S. 590 (1944)). You might imagine a security guard sitting in a chair, neither using physical or mental exertion, but neither free to leave nor being paid. Closing that hole, the court decided that no exertion at all is necessary, rather all hours whether standing idle or not must be paid, and that \u201creadiness to serve may be hired, quite as much as the service itself, and time spent lying in wait for threats to the safety of the employer\u2019s property may be treated by the parties as a benefit to the employer\u201d (Armour & Co. v. Wantock<\/em>, 323 U.S. 126 (1944); Skidmore v. Swift<\/em>, 323 U.S. 134 (1944)).<\/p>\n

Next, you might imagine an employee \u2018suffered or permitted<\/strong>\u2019 to work but not requested<\/em> \u2018to work\u2019; through the employee\u2019s own volition, may desire to correct an error or finish an assigned task after hours. The courts decided, so long as the employer knows or has reason to believe that the employee is working, the employee must be paid (Kappler v. Republic Pictures Corp<\/em>. 327 U.S. 757 (1946)). That means, even if the employee is willing to do the work without being paid and despite the employer not wanting the employee to do the work, the only way the employer can comply with the law is to pay the employee. But, consider an issue that did not exist in 1946: non-exempt employees answering work emails after hours. In summary: the employee\u2019s choice to work, and the employer having reason to know the employee is working, requires the employer to pay the employee.<\/p>\n

Independent Contractors<\/strong>: Independent contractors by virtue of their position are not employees. And therefore no employee\/employer relationship exists (the FLSA does not apply) and an employer is not necessarily required to withhold income taxes pay Social Security, Medicare taxes, etc. Some distinguishing factors that your independent contractor agreements have that your employment agreements likely do not have are \u201cthe company does not have the right to control the manner in which the contractor will complete the project\u201d, \u201cthe contractor is obligated to pay income or self-employment taxes and will receive a 1099\u201d, \u201cthe contractor must provide his or her own liability, worker\u2019s compensation, health, and disability insurance\u201d, and \u201ccosts such as meals and transportation are included in the contract price for the project and will not be billed to the company\u201d. For example the independent contractor decides what tools or equipment to use, and where and when to work.<\/p>\n

Now lets move on to the issue that we are truly writing about:<\/p>\n

An expanded economic realities test<\/strong>: Courts deciding whether the worker is an employee or independent contractor apply the FLSA, which requires the use of the (court defined) multi-factored economic realities<\/em> test. And within that test each factor is considered independently of all the others (no one factor will decide affirmatively one way or the other). The factors vary in actual court use, but the DOL\u2019s factors do represent a typical list:<\/p>\n

(A<\/strong>) the extent to which the work performed is an integral part of the employer\u2019s business; (B<\/strong>) the worker\u2019s opportunity for profit or loss depending on his or her managerial skill; (C<\/strong>) the extent of the relative investments of the employer and the worker; (D<\/strong>) whether the work performed requires special skills and initiative; (E<\/strong>) the permanency of the relationship; and (F<\/strong>) the degree of control exercised or retained by the employer (DOL Admin. Interpretation 2015-1<\/em>).<\/p>\n

Through this test, the Court determines if the worker is economically dependent on the entity (employee) or if the worker is in business for him or herself (independent contractor). This recently released Administrative Interpretation<\/em> broaden the courts<\/em> factors as follows (these examples could be extended to any worker):<\/p>\n

(A<\/strong>) carpenters would be integral<\/em> to a construction company that frames residential homes, because carpentry is integral to framing houses;<\/p>\n

(B<\/strong>) a janitor that does not schedule assignments, solicit additional work for other clients, advertise services, or endeavor to reduce costs, would not exercise managerial skill<\/em> that affects profit or loss;<\/p>\n

(C<\/strong>) a janitor working for a cleaning company is issued MISC-1099, signs an independent contractor agreement each year, but is provided a vehicle, equipment and supplies, does no advertising or finding clients, has a relative investment<\/em> comparison with the employer indicative of an employment relationship;<\/p>\n

(D<\/strong>) a highly skilled carpenter that does not make any independent judgments at the job site beyond the work he or she is doing for that job, does not determine the sequence of work, does not order additional materials, and does not think about bidding the next job, but rather is told where to perform what work does not demonstrate skill and initiative<\/em> of an independent contractor;<\/p>\n

(E<\/strong>) an editor working for a publishing house for several years completes his or her edits in accordance with the publishing house\u2019s specifications, the publishing houses assigned books, and using its software, indicates a permanence<\/em> of an employment relationship; and,<\/p>\n

(F<\/strong>) a skilled registered nurse listed with the Beta Nurse Registry (BNR) provides care in nursing homes, as was interviewed prior to joining the BNR and requires the nurse to undergo multi-day training; BNR sends the nurse a list of potential clients and requires the nurse to fill out a form with BNR prior to contacting clients and requires the nurse to inform BNR if she is hired by the client or misses work, the degree of control<\/em> exercised by BNR is indicative of an employment relationship.<\/p>\n

Within this Administrator\u2019s Interpretation No. 2015-1, the DOL provides guidance that backs a much broader standard to determine who is an employee and who is not, way further than what courts have already decided. This is essentially the to suffer or permit standard from \u2018to pay or not to pay\u2019 applied to \u2018employee or independent contractor\u2019; rather than using the plain text of the FLSA and the first set (A-F) of court decided factors mentioned above.<\/p>\n

Conclusion:<\/strong> The Administrator applies a worker determinative<\/u> standard from suffer or permit <\/em>(payment) in the FLSA to an employee or independent contractor test<\/strong>. Where an employee may be the one who decides to stay late and thus be entitled to overtime (so long as the employer has reason to know), under this interpretation an independent contractor who decides to act<\/strong> like an employee would easily (with very little argument) become an employee by virtue of their actions alone and not by the intent of the relationship and employers expectations.<\/p>\n

With this guidance, classifying workers as independent contractors is now much more difficult, and should be very carefully considered<\/em>. It would be tragic for an independent contractor to be declared an employee and then to apply their existing contract as an employment contract<\/em>.<\/p>\n

Although this interpretation is not a change in policy or regulation, it does pave the way for the DOL to broadly classify independent contractors as employees, penalizing employers by (1) forcing them into legal defense, and then (2) taxing employers by forcing them to reclassify independent contractors as employees to avoid this added scrutiny or potential risk of violation.<\/p>\n

As an employer be prepared for Congress to draw regulations based upon this interpretation. Today, in light of these expanded standards, review every independent contractor that your business pays and expects to issue a 1099. If you find an independent contractor whom you believe might fall within the DOL\u2019s employee category feel free to ask. It is better to be safe than stuck paying back income and taxes. As we wade through this uncertain water, without redrafting all independent contractor agreements, we suggest shortening your contracts to under a year and carefully reviewing the business of the independent contractor that you are seeking to hire.<\/p>\n

FLSA White-Collar Exception:
\n<\/u><\/strong>The DOL released its updated proposed rules on \u2018white-collar exemptions\u2019 under the FLSA. As you know, presently to qualify under the white-collar exemption an employee must be (brief summary only): (1) paid a fixed salary each workweek irrespective of work quality or quantity, (2) executive, administrative, professional, outside sales, or a computer professional, and (3) the salary requirement of $455 per week ($23,660 is below poverty for a family of four) or $100,000 per year for highly compensated employees. The proposed regulation<\/strong> will up the salary constraints to be equal to the 40th<\/sup> percentile of weekly earnings for full-time salaried workers or in 2016 estimated at $970 per week ($50,440) and highly compensated employees will be set to $122,148 annually. It is important that you count and calculate the number of \u2018gap employees\u2019 between $23,660 and $50,440 so that you have some time to react if this regulation becomes codified (a change will be coming either way so be prepared). You can still (1) pay those employees overtime if they work overtime, (2) send employees home who are at 40 hours (prevent overtime), or (3) you could bump the employees close to $50,440 to the next rate once this or similar regulation is passed.<\/p>\n

 <\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

Independent Contractors vs. Employees: Brace yourself for a possible future of unfavorable rules and legislation regarding independent contractors. On July 15, 2015 the United States Department of Labor (\u201cDOL\u201d), Wage and Hour Division, took an interesting step by releasing its expansive application of the \u201cSuffer or Permit\u201d standard found within the Fair Labor Standard\u2019s Act […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[],"class_list":["post-186","post","type-post","status-publish","format-standard","hentry","category-larticles"],"_links":{"self":[{"href":"https:\/\/zamzowfabian.com\/articles\/wp-json\/wp\/v2\/posts\/186","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zamzowfabian.com\/articles\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zamzowfabian.com\/articles\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zamzowfabian.com\/articles\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/zamzowfabian.com\/articles\/wp-json\/wp\/v2\/comments?post=186"}],"version-history":[{"count":0,"href":"https:\/\/zamzowfabian.com\/articles\/wp-json\/wp\/v2\/posts\/186\/revisions"}],"wp:attachment":[{"href":"https:\/\/zamzowfabian.com\/articles\/wp-json\/wp\/v2\/media?parent=186"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zamzowfabian.com\/articles\/wp-json\/wp\/v2\/categories?post=186"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zamzowfabian.com\/articles\/wp-json\/wp\/v2\/tags?post=186"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}