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Business and Policy Areas
Business and Policy Areas

Labor Department Issues Guidance on Misclassification of Workers

August 10, 2015

As more employers, particularly in industries such as call centers, janitorial services, and construction, are relying on contract workers to meet operational needs, worker misclassification has come under increased scrutiny from the Department of Labor (DOL). New guidance in the form of a 15-page memorandum, presents a broad definition of "employee" under the Fair Labor Standards Act (FLSA).

Background. The FLSA does not define who is or is not an employee in exact terms. However, over years of case law and regulations, the "economic realities" test has emerged, which inlcudes six factors that guide the determination of the classification of a worker as either an employee or contractor:

  • The extent to which the work performed is an integral part of the employer's business.
  • The worker's opportunity for profit or loss depending on his or her managerial skill.
  • The extent of the relative investments of the employer and the worker.
  • Whether the work performed requires special skills and initiative.
  • The permanency of the relationship.
  • The degree of control exercised or retained by the employer.

What now? The July 15 memo states that "most workers are employees under the FLSA's broad definitions" and clarifies that DOL is making worker classification an enforcement priority, citing the growing use of independent contractors. 

Citing the FLSA's "expansive coverage for workers," the memo states that the factors should be used as guides, emphasizing that each one should be "considered in light of the ultimate determination of whether the worker is really in business for him or herself ... or is economically dependent on the employer."

Technically, the guidance does not change the law. However, it sheds light on how DOL will interpret and apply FLSA going forward. 

Under FLSA, wrongful classification of workers can result in steep penalties. Employers may  be liable for two to three times the wages owed, in addition to attorneys' fees.


Mary Bachinger
Director, Tax Policy