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.    

Sharing of Corporate Payroll and HR Functions May Result in "Joint Employment" -- Castaneda v. The Ensign Group, Inc.

Publicly traded corporations have increasingly adopted a structure in which a main corporate entity acts as a central "holding company" which conducts its operations through a series of wholly owned entities. The Corporation internally designates its workers as being "employed" by these entities.  As often as not, however, the employees have never heard of the specific entity that allegedly employs them.  Moreover, the employment policies and payroll functions for these operating entities typically emanate from a central corporate HR department and a "shared services" entity.  

In Castaneda v. The Ensign Group, Inc., the California Appellate Court held that this structure of common ownership and shared services is likely to create a "joint employment" relationship for purposes of wage and hour liability.  

An entity that controls the business enterprise may be an employer even if it did not directly hire, fire or supervise the employees.  Multiple entities may be employers where they control different aspects of the employment relationship. This occurs, for example, when one entity (such as a temporary employment agency) hires and pays a worker, and another entity supervises the work.

* * * 

Here Ensign has more than a contractual relationship with Cabrillo. Ensign owns Cabrillo. It purchased it in 2009 and it owns all of its stock. A trier of fact could infer this evidence refutes Ensign's claims of lack of control and responsibility.

(Internal citations and punctuation omitted).  Moreover, the court noted that the corporate parent could be found to be a joint employment based on evidence that its various subsidiaries shared "centralized information technology, human resources, accounting, payroll, legal, risk management, educational and other key services."  (Emphasis in original).

Thus, while it may make eminent business sense for related entities to share common HR, accounting and payroll functions, these shared functions are also likely to result in shared responsibility for wage and hour obligations.   

 

Delivery Drivers are Employees, Not Contractors -- Ruiz v. Affinity Logistics, Inc.

 In Ruiz v. Affinity Logistics Corp., ("Ruiz II"), the Ninth Circuit determined that a class of delivery drivers had been improperly classified as independent contractors.  The decision reversed the lower court's finding of employee status following a bench trial.  

The Defendant had required that its drivers form their own companies and execute contracts designating their relationship as independent contractors.  Nevertheless, the company still controlled every aspect of the drivers' operation from their rates and routes to the "color of their socks."  Based on this extensive record of control the Ninth Circuit had no trouble concluding that they were not bona fide contractors.  But the court's analysis did address several points that may be of interest in other, closer, fact patterns.

First, the Court emphasized that anytime personal services are provided an employment relationship is presumed.  Thus, while not using the precise terminology, a claim of an independent contractor relationship is effectively an affirmative defense.

Second, the Court rejected the argument that the drivers' ability to hire their own "helpers" took them outside of an employment relationship.  In particular, this fact did not support contractor status as "the drivers did not have an unrestricted right to choose these persons which is an important right that would normally inure to a self-employed contractor."  

A service provider can legitimately be an independent contractor if he has real autonomy and the opportunity to make a profit by exercising his own business judgment and discretion.  But Ruiz II illustrates that courts will generally reject any arrangement that functions merely as de facto employment dressed up with the appearance of independence.