Department of Labor Issues Employee Classification Memo Under the Fair Labor Standards Act
Employee and wage classification lawsuits are on the rise. Uber. Fed Ex. Instacart. The news media headlines are riddled with references to wage lawsuits and putative class actions against employers, like these, who allegedly misclassify and ultimately, underpay, their employees. Liability and damages in these lawsuits hinge on whether the company properly classified the person as an “employee” or “independent contractor”.
Yesterday, the US Department of Labor (“DOL”) weighed in with a 15 page “guidance memorandum” that is a must read for employers. The DOL concluded that employers who improperly classify employees deprive workers of important workplace protections, such as minimum wage, overtime compensation, unemployment insurance and workers compensation. The DOL therefore called for a broad interpretation of the definition of an employee.
According to the DOL memo, the proposed application of its “economic realities” test, combined with the broad definition of “employ” in the FLSA, will result in “most workers” being classified as employees under the FLSA. In that regard, the DOL notes the FLSA’s statutory directive is that the scope of the employment relationship is very broad. To that end, a proper analysis of a worker’s classification must be based on the economic realities of the relationship and not merely on the amount of control exerted by an employer. In analyzing the “economic realities” test factors, the “ultimate inquiry” is whether the worker is economically dependent on the employer or if the worker is truly in business for himself. A worker who is economically dependent should be classified as an employee and not an independent contractor.
What does that mean for companies? Anyone currently defined by an independent contractor will require a closer look, as you may now be subject to FLSA liability. The DOL and plaintiff’s attorneys will continue to scrutinize your business structure on behalf of workers and will now use this memorandum to support their wage claim lawsuits. Employers should be aware of the memo’s contents and seek counsel to evaluate the current structure of their employees and independent contractors.