Department of Labor Issues Aggressive Memo Going After "Misclassified" Independent Contractors -- Administrator's Interpretation No. 2015-1

On July 15, 2015, the Wage and Hour Division of the federal Department of Labor issued an "Administrator's Interpretation" that takes a very aggressive stance against the use of independent contractor status in the workplace.  The interpretation is significant as courts are directed to give deference to the DOL's interpretation of the law to the extent it is generally consistent with the FLSA and its implementing regulations.

In particular the memo notes that: "The FLSA’s definition of employ as 'to suffer or permit to work' and the later-developed 'economic realities' test provide a broader scope of employment than the common law control test." Thus,

In order to make the determination whether a worker is an employee or an independent contractor under the FLSA, courts use the multi-factorial “economic realities” test, which focuses on whether the worker is economically dependent on the employer or in business for him or herself.  A worker who is economically dependent on an employer is suffered or permitted to work by the employer. Thus, applying the economic realities test in view of the expansive definition of “employ” under the Act, most workers are employees under the FLSA.

In applying the economic realities factors, courts have described independent contractors as those workers with economic independence who are operating a business of their own. On the other hand, workers who are economically dependent on the employer, regardless of skill level, are employees covered by the FLSA.

The memo goes on to opines that:

The “control” factor, for example, should not be given undue weight. The factors should be considered in totality to determine whether a worker is economically dependent on the employer, and thus an employee. The factors should not be applied as a checklist, but rather the outcome must be determined by a qualitative rather than a quantitative analysis.The application of the economic realities factors is guided by the overarching principle that the FLSA should be liberally construed to provide broad coverage for workers, as evidenced by the Act’s defining “employ” as “to suffer or permit to work.”

The DOL thus seems to advocate an alternative test under which an entity is liable for the wages of any worker whose compensation ultimately derives from doing work for that entity.  

One potential flaw in the Administrator's legal analysis however is that it selectively relies on tests applicable to different issues.  For example, an employee of one company may simultaneously be a "joint employee" of another company based on the "economic realities" of the relationship between the two companies.  Likewise, a company is said to have "suffered or permitted" unrecorded work by one of its current employees if it "knew or should have known" that the work was performed.   In both cases, however, there is no dispute that the worker was an "employee" to begin with.

It thus remains to be seen if courts will accept the DOL's invitation to apply the "economic realities" and "suffer or permit" formulas as the new litmus test for independent contractor status as well.    

Class Certification Is Proper Where Employer Never Paid Meal Period Premiums -- Safeway, Inc. v. Superior Court (Esparza)

The Labor Code and Wage Orders impose two separate obligations on employers: (a) to provide uninterrupted, 30-minute off-duty meal periods at specified time intervals; and (b) to pay one hour of compensation as a "premium wage" for each time that the employee was effectively prevented from actually taking such a compliant break. 

In the aftermath of Brinker v. Superior Court, courts have found that evaluating whether an employer has implemented an affirmative policy that fully complies with the first duty is well suited to a class-wide determination of liability.  But what if the employer has a perfect policy on paper but never actually pays any premium compensation under the policy? 

In Safeway Inc. v. Superior Court (Esparza), the court explained that such a uniform record of non-payment warrants class certification, at least where it is statistically implausible that such premium payments were never earned by class members.   

In granting class certification, the trial court stated: “[Real parties] prove[] that[] before June 17, 2007, Safeway did not pay meal break premiums. . . . Safeway does not contest this fact. Safeway had thousands or tens of thousands of workers, but for years it never paid statutory meal break premiums. Why? One explanation is human perfection: Safeway never, ever erred.” This explanation is possible. But human perfection is rare. Another explanation is deep, system-wide error: that Safeway was unaware of, or for some other reason[,] violated[] its duty to pay statutory premiums when required. [¶] This situation presents the central and predominating common issue: did Safeway’s system-wide failure to pay appropriate meal break premiums make it liable to the class during this period. This dominant common issue makes certification proper . . . .

The Safeway Court went on to explain that under this theory of liability -- i.e., a uniform practice of never paying appropriate meal premium pay -- it would not be necessary for the class to prove each instance of a meal break violation, to prove that "all or virtually all" of the class were owed compensation, or to prove the precise amount of premium pay owed.  

Rather, the class could use statistical analysis of time records and other data to establish that "on a system-wide basis, petitioners denied the class members the benefits of the the compensation guarantee [of] . . . section 226.7."  In particular, the "time punch data and records identified by [Plaintiff's expert] are capable of raising a rebuttable presumption that a significant portion of the missed, shortened and delayed meal breaks reflected meal break violations under section 226.7."

The lesson of Safeway is clear: It is not sufficient for an employer to merely implement a policy that effectively provides compliant meal breaks.  The employer must also record the timing and duration of the breaks, and then implement a separate good faith mechanism for determining whether a premium wage is actually due as a result of any missed breaks.  If the employer simply assumes 100% of the time that no wage is due this practice may expose it to class-wide liability.