Obama Administration Officially Declares War on Independent Contractors

We have been reporting for some time that the Obama Administration has declared war on the independent contractor relationship. Their goal: make it really hard to qualify any worker as a legitimate independent contractor and to reclassify most workers as "employees" (who will then be protected by the myriad of federal and state labor laws).

In case there was any doubt about the Administration's objectives, last week the U.S. Department of Labor issued an official "Administrator's Interpretation" on the topic. In it, the DOL boldly declared that most workers will be employees, not independent contractors. [DOL memo]

This admonition couldn't be any clearer. Any company using independent contractors is now on official notice that the federal government considers most companies that engage independent contractors to be labor law scofflaws. This is intended to be fair warning that the federal wage-hour agency intends to bring an end to the practice.

Companies that make a mistake and misclassify employees as independent contractors face a world of hurt if they are sued. Compliance audits by any one of the several federal and state agencies that care about such matters are expensive and time consuming to resolve.  And, class action lawsuits over worker misclassification are hugely popular these days.

The way we see it, the only way to get it right is to start with the basic proposition that every worker is an employee unless you are really confident that the independent contractor relationship will pass muster if tested. And, don't get too excited about the fact that you have a contract with the employee stating that she/he is a contractor. While it's good evidence of what the parties intend, a fancy written contract isn't worth the paper it's written on unless the actual relationship comports with the law.

When doing your analysis, you'll have to keep one very unsettling reality in mind. There is no such thing as a safe harbor. Indeed, case law makes clear that one agency's findings on the matter are not binding on another. To make matters worse, different agencies and courts weigh different factors and then ascribe to them different levels of importance. So, from a risk management perspective, success before one agency does not guarantee success before any others.

For example, defeating the claim of a contractor who files for unemployment insurance doesn't insulate the company from a case brought by that same person (or class or workers) before the EEOC for discrimination or a claim before the Workers Compensation Appeals Board for an industrial injury. Keep in mind that if the situation is a close call, you are sticking your chin out big time and risking costly litigation.

At its core, these DOL guidelines, as well as those of other agencies and courts, are designed to examine whether the contractor truly is in business for him/herself.  Using a formulation called the "economic realities" test, the DOL guidelines focus on six factors DOL deems important to evaluate whether the worker is "economically dependent" on the employer (in which case the worker is an employee) or truly an independent businessperson with all of the trappings of an independent business.

Other agencies and courts look at what's referred to in the literature as the "right to control" test, examining whether the company retains the right to tell the putative contractor what to do, how to do it, when to do it and where to do it. Layered on to that test is a review of where the work is done (i.e., at the company's facilities or at the contractor's office?), whose equipment and materials are used in the work and whether the contractor has a financial stake in the venture.  More control over the methods and means of how the work is done indicates employment, as does the use of equipment and supplies owned by the company as opposed to the contractor. And, if the contractor has no risk of financial loss if the project doesn't go well, then this also leans in favor of employment.

By issuing these guidelines, the Obama Administration is throwing down the gauntlet when it comes to worker misclassification.  We can help with that analysis.  If you have any questions about the contents of this article, please contact any member of the Firm. We can be reached at (818) 508-3700, or online at www.brgslaw.com.