Department of Labor Issues Guidance on Categorization of Independent Contractors and Employees

August 6, 2015

On July 15, 2015, the head of the Wage Hour Division of the United States Department of Labor (the “DOL”) issued a 15-page guidance which states that the DOL takes the position that most workers are employees under the Fair Labor Standards Act and should not be classified as independent contractors.  New York State and other states and agencies have also increased enforcement efforts regarding independent contractors and are subjecting employers who classify individuals as independent contractors to stricter scrutiny.

There have also recently been conflicting court and agency decisions regarding the independent contractor status of Uber drivers and Fed Ex drivers.  On the other hand, a recent decision by the United States Court of Appeals for the Second Circuit upheld the independent contractor status of tennis umpires who work at the U.S. Open.

The potential liabilities and penalties for an employer due to misclassifications of individuals as an independent contractor can be substantial, and the fees and expenses in litigating such issues can also be significant.  Moreover, proper classification of individuals as employees or independent contractors is even more important due to the upcoming January 2016 requirements under the Affordable Care Act regarding health insurance coverage, notices and recordkeeping under that Act.

The DOL did state that it “supports the use of legitimate independent contractors,” but the DOL reiterated that independent contractor status is a legal question which is determined by an “economic realities” test of the working relationship between the employer and the worker.  The DOL further advises in its Administrative Interpretation that there are several factors to consider regarding independent contractors, and each independent contractor situation should be analyzed based on the specific facts of each such relationship.  Further, the DOL stated that, in its opinion, job titles and written agreements are not controlling.

In another new development, New York City has just enacted two new employment laws which both take effect in September 2015.  These new laws place new restrictions on employers during hiring and employment regarding adverse employment actions based on criminal convictions, as well as prohibiting the use of the credit history of applicants and employees when making employment decisions.  New York State law, Federal law and Equal Employment Opportunity Commission guidelines already impose notice requirements and restrictions on employers regarding prior criminal convictions and background checks.

Due to these new laws, decisions and agency enforcement efforts, employers should examine and update their independent contractor relationships and agreements.  Employers should also review, update and revise their employment applications, hiring practices, employment agreements, employee handbooks and employment policies.

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