"Administrator's Interpretation No. 2015-1 - the Application of the Fair Labor Standards Act's '"suffer or Permit'" Standard in the Identification of Employees Who Are Misclassified as Independent Contractors"

Administrator's Interpretation No. 2015-1 - the Application of the Fair Labor Standards Act's '"suffer or Permit'" Standard in the Identification of Employees Who Are Misclassified as Independent Contractors is a 15-page legal document that was released by the U.S. Department of Labor - Wage and Hour Division on July 15, 2015 and used nation-wide.

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U.S. Department of Labor
Wage and Hour Division
Washington, D.C. 20210
_____________________________________________________________________________
Administrator’s Interpretation No. 2015-1
July 15, 2015
Issued by ADMINISTRATOR DAVID WEIL
SUBJECT: The Application of the Fair Labor Standards Act’s “Suffer or Permit” Standard in
the Identification of Employees Who Are Misclassified as Independent Contractors.
Misclassification of employees as independent contractors is found in an increasing number of
workplaces in the United States, in part reflecting larger restructuring of business organizations.
When employers improperly classify employees as independent contractors, the employees may
not receive important workplace protections such as the minimum wage, overtime compensation,
unemployment insurance, and workers’ compensation. Misclassification also results in lower tax
revenues for government and an uneven playing field for employers who properly classify their
workers. Although independent contracting relationships can be advantageous for workers and
businesses, some employees may be intentionally misclassified as a means to cut costs and avoid
compliance with labor laws.
The Department of Labor’s Wage and Hour Division (WHD) continues to receive numerous
complaints from workers alleging misclassification, and the Department continues to bring
successful enforcement actions against employers who misclassify workers. In addition, many
states have acknowledged this problematic trend and have responded with legislation and
misclassification task forces. Understanding that combating misclassification requires a multi-
pronged approach, WHD has entered into memoranda of understanding with many of these
1
states, as well as the Internal Revenue Service.
In conjunction with these efforts, the
Administrator believes that additional guidance regarding the application of the standards for
determining who is an employee under the Fair Labor Standards Act (FLSA or “the Act”) may
be helpful to the regulated community in classifying workers and ultimately in curtailing
misclassification.
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. Indeed, although the common law control test was the prevalent test for determining
whether an employment relationship existed at the time that the FLSA was enacted, Congress
rejected the common law control test in drafting the FLSA. See Walling v. Portland Terminal
Information about the Department’s Misclassification Initiative and related memoranda of
1
understanding is available at http://www.dol.gov/whd/workers/misclassification/.
U.S. Department of Labor
Wage and Hour Division
Washington, D.C. 20210
_____________________________________________________________________________
Administrator’s Interpretation No. 2015-1
July 15, 2015
Issued by ADMINISTRATOR DAVID WEIL
SUBJECT: The Application of the Fair Labor Standards Act’s “Suffer or Permit” Standard in
the Identification of Employees Who Are Misclassified as Independent Contractors.
Misclassification of employees as independent contractors is found in an increasing number of
workplaces in the United States, in part reflecting larger restructuring of business organizations.
When employers improperly classify employees as independent contractors, the employees may
not receive important workplace protections such as the minimum wage, overtime compensation,
unemployment insurance, and workers’ compensation. Misclassification also results in lower tax
revenues for government and an uneven playing field for employers who properly classify their
workers. Although independent contracting relationships can be advantageous for workers and
businesses, some employees may be intentionally misclassified as a means to cut costs and avoid
compliance with labor laws.
The Department of Labor’s Wage and Hour Division (WHD) continues to receive numerous
complaints from workers alleging misclassification, and the Department continues to bring
successful enforcement actions against employers who misclassify workers. In addition, many
states have acknowledged this problematic trend and have responded with legislation and
misclassification task forces. Understanding that combating misclassification requires a multi-
pronged approach, WHD has entered into memoranda of understanding with many of these
1
states, as well as the Internal Revenue Service.
In conjunction with these efforts, the
Administrator believes that additional guidance regarding the application of the standards for
determining who is an employee under the Fair Labor Standards Act (FLSA or “the Act”) may
be helpful to the regulated community in classifying workers and ultimately in curtailing
misclassification.
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. Indeed, although the common law control test was the prevalent test for determining
whether an employment relationship existed at the time that the FLSA was enacted, Congress
rejected the common law control test in drafting the FLSA. See Walling v. Portland Terminal
Information about the Department’s Misclassification Initiative and related memoranda of
1
understanding is available at http://www.dol.gov/whd/workers/misclassification/.
Co., 330 U.S. 148, 150-51 (1947). Instead, the FLSA defines “employ” broadly as including “to
suffer or permit to work,” 29 U.S.C. 203(g), which clearly covers more workers as employees,
see U.S. v. Rosenwasser, 323 U.S. 360, 362-63 (1945).
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
2
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. The
application of the economic realities factors must be consistent with the broad “suffer or permit
to work” standard of the FLSA.
This Administrator’s Interpretation first discusses the pertinent FLSA definitions and the breadth
of employment relationships covered by the FLSA. When determining whether a worker is an
employee or independent contractor, the application of the economic realities factors should be
guided by the FLSA’s statutory directive that the scope of the employment relationship is very
broad. This Administrator’s Interpretation then addresses each of the factors, providing citations
to case law and examples. All of the factors must be considered in each case, and no one factor
(particularly the control factor) is determinative of whether a worker is an employee. Moreover,
the factors themselves should not be applied in a mechanical fashion, but with an understanding
that the factors are indicators of the broader concept of economic dependence. Ultimately, the
goal is not simply to tally which factors are met, but to determine whether the worker is
economically dependent on the employer (and thus its employee) or is really in business for him
or herself (and thus its independent contractor). The factors are a guide to make this ultimate
3
determination of economic dependence or independence.
The Economic Realities Factors Should Be Applied in View of the FLSA’s Broad
I.
Scope of Employment and “Suffer or Permit” Standard
While most misclassified employees are labeled “independent contractors,” the Department has
2
seen an increasing number of instances where employees are labeled something else, such as
“owners,” “partners,” or “members of a limited liability company.” In these instances, the
determination of whether the workers are in fact FLSA covered employees is also made by
applying an economic realities analysis.
The analysis in this Administrator’s Interpretation should also be applied in determining
3
whether a worker is an employee or an independent contractor in cases arising under the Migrant
and Seasonal Agricultural Worker Protection Act (MSPA) and the Family and Medical Leave
Act (FMLA). MSPA expressly adopts the FLSA’s definition of “employ” as MSPA’s definition
of “employ” and thus incorporates the broad “suffer or permit” standard for determining the
scope of employment relationships. See 29 U.S.C. 1802(5) (“The term ‘employ’ has the
meaning given such term under [the FLSA, 29 U.S.C. 203(g)].”); see also 29 C.F.R.
500.20(h)(1)-(4). The FMLA also adopts the FLSA’s definition of “employ” for employer
coverage and employee eligibility purposes (subject to additional eligibility requirements). See
29 U.S.C. 2611(3); 29 C.F.R. 825.105.
2
The FLSA’s definitions establish the scope of the employment relationship under the Act and
provide the basis for distinguishing between employees and independent contractors. The FLSA
defines “employee” as “any individual employed by an employer,” 29 U.S.C. 203(e)(1), and
“employer” as including “any person acting directly or indirectly in the interest of an employer
in relation to an employee,” 29 U.S.C. 203(d). The FLSA’s definition of “‘employ’ includes to
suffer or permit to work.” 29 U.S.C. 203(g). This “suffer or permit” concept has broad
applicability and is critical to determining whether a worker is an employee and thus entitled to
the Act’s protections.
The “suffer or permit” standard was specifically designed to ensure as broad of a scope of
statutory coverage as possible. See Rosenwasser, 323 U.S. at 362-63 (“A broader or more
comprehensive coverage of employees . . . would be difficult to frame.”); Nationwide Mut. Ins.
Co. v. Darden, 503 U.S. 318, 326 (1992) (“employ” is defined with “striking breadth”). The
Supreme Court “has consistently construed the Act ‘liberally to apply to the furthest reaches
consistent with congressional direction,’ recognizing that broad coverage is essential to
accomplish the [Act’s] goal . . . .” Tony & Susan Alamo Found. v. Sec’y of Labor, 471 U.S. 290,
296 (1985) (quoting Mitchell v. Lublin, McGaughy & Assocs., 358 U.S. 207, 211 (1959))
(internal citation omitted).
The history of the “suffer or permit” standard highlights its broad applicability. Prior to the
FLSA’s enactment, the phrase “suffer or permit” (or variations of the phrase) was commonly
used in state laws regulating child labor and was “designed to reach businesses that used
middlemen to illegally hire and supervise children.” Antenor v. D & S Farms, 88 F.3d 925, 929
n.5 (11th Cir. 1996). A key rationale underlying the “suffer or permit” standard in child labor
laws was that the employer’s opportunity to detect work being performed illegally and the ability
to prevent it from occurring was sufficient to impose liability on the employer. See, e.g., People
ex rel. Price v. Sheffield Farms-Slawson-Decker Co., 225 N.Y. 25, 29-31 (N.Y. 1918). Thus,
extending coverage of child labor laws to those who suffered or permitted the work was designed
to expand child labor laws’ coverage beyond those who controlled the child laborer, counter an
employer’s argument that it was unaware that children were working, and prevent employers
from using agents to evade requirements.
Unlike the common law control test, which analyzes whether a worker is an employee based on
the employer’s control over the worker and not the broader economic realities of the working
relationship, the “suffer or permit” standard broadens the scope of employment relationships
covered by the FLSA. Indeed, the FLSA’s statutory definitions (including “suffer or permit”)
rejected the common law control test that was prevalent at the time. As the Supreme Court
explained:
[I]n determining who are “employees” under the Act, common law employee categories
or employer-employee classifications under other statutes are not of controlling
significance. This Act contains its own definitions, comprehensive enough to require its
application to many persons and working relationships, which prior to this Act, were not
deemed to fall within an employer-employee category.
3
Walling, 330 U.S. at 150-51 (internal citation omitted); see also Darden, 503 U.S. at 326
(FLSA’s “suffer or permit” standard for employment “stretches the meaning of ‘employee’ to
cover some parties who might not qualify as such under a strict application of traditional agency
law principles.”); Antenor, 88 F.3d at 933
(“Indeed, the ‘suffer or permit to work’ standard was
developed to assign responsibility to businesses that did not directly supervise putative
employees.”). Thus, the scope of employment under the FLSA is the “‘broadest definition that
has ever been included in any one act.’” Rosenwasser, 323 U.S. at 363 n.3 (quoting from
statement of Senator Black on Senate floor).
An “entity ‘suffers or permits’ an individual to work if, as a matter of economic reality, the
individual is dependent on the entity.” Antenor, 88 F.3d at 929. The Supreme Court and Circuit
Courts of Appeals have developed a multi-factor “economic realities” test to determine whether
a worker is an employee or an independent contractor under the FLSA. See, e.g., Tony & Susan
Alamo, 471 U.S. at 301 (noting that the test of employment under the FLSA is economic reality);
Goldberg v. Whitaker House Co-op, Inc., 366 U.S. 28, 33 (1961) (the economic realities of the
worker’s relationship with the employer control, rather than any technical concepts used to
characterize that relationship). The factors typically include: (A) the extent to which the work
performed is an integral part of the employer’s business; (B) the worker’s opportunity for profit
or loss depending on his or her managerial skill; (C) the extent of the relative investments of the
employer and the worker; (D) whether the work performed requires special skills and initiative;
(E) the permanency of the relationship; and (F) the degree of control exercised or retained by the
4
employer.
In undertaking this analysis, each factor is examined and analyzed in relation to one another, and
no single factor is determinative. 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.”
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. See, e.g., Hopkins v. Cornerstone Am., 545 F.3d 338, 343
(5th Cir. 2008) (“To determine if a worker qualifies as an employee, we focus on whether, as a
matter of economic reality, the worker is economically dependent upon the alleged employer or
is instead in business for himself.”); Baker v. Flint Eng’g & Constr. Co., 137 F.3d 1436, 1440
(10th Cir. 1998) (the economic realities of the relationship govern, and the focal point is whether
the individual is economically dependent on the business to which he renders service or is, as a
matter of economic fact, in business for himself); Brock v. Superior Care, Inc., 840 F.2d 1054,
4
The number of factors and the exact articulation of the factors may vary some depending on the
court. Courts routinely note that they may consider additional factors depending on the
circumstances and that no one factor is determinative.
4
1059 (2d Cir. 1988) (“The ultimate concern is whether, as a matter of economic reality, the
workers depend on someone else’s business . . . or are in business for themselves.”).
“Ultimately, in considering economic dependence, the court focuses on whether an individual is
‘in business for himself’ or is ‘dependent upon finding employment in the business of others.’”
Scantland v. Jeffry Knight, Inc., 721 F.3d 1308, 1312 (11th Cir. 2013) (quoting Mednick v.
Albert Enters., Inc., 508 F.2d 297, 301-02 (5th Cir. 1975)).
Moreover, the economic realities of the relationship, and not the label an employer gives it, are
determinative. Thus, an agreement between an employer and a worker designating or labeling
the worker as an independent contractor is not indicative of the economic realities of the working
relationship and is not relevant to the analysis of the worker’s status. See, e.g., Scantland, 721
F.3d at 1311 (“This inquiry is not governed by the ‘label’ put on the relationship by the parties or
the contract controlling that relationship, but rather focuses on whether ‘the work done, in its
essence, follows the usual path of an employee.’”) (quoting Rutherford Food Corp. v. McComb,
331 U.S. 722, 729 (1947)); Superior Care, 840 F.2d at 1059 (“[E]mployer’s self-serving label of
workers as independent contractors is not controlling.”); Robicheaux v. Radcliff Material, Inc.,
697 F.2d 662, 667 (5th Cir. 1983) (explaining that “[a]n employee is not permitted to waive
employee status,” and affirming that welders were employees despite having signed independent
contractor agreements). Likewise, workers who are classified as independent contractors may
receive a Form 1099-MISC from their employers. This form simply indicates that the employer
engaged the worker as an independent contractor, not that the worker is actually an independent
contractor under the FLSA. See Olson v. Star Lift Inc., 709 F. Supp. 2d 1351, 1356 (S.D. Fla.
2010) (worker’s receipt of Form 1099-MISC from employer does not weigh in favor of
independent contractor status). “Economic realities, not contractual labels, determine
employment status for the remedial purposes of the FLSA.” Real v. Driscoll Strawberry Assocs.,
Inc., 603 F.2d 748, 755 (9th Cir. 1979).
The ultimate inquiry under the FLSA is whether the worker is economically dependent on the
employer or truly in business for him or herself. If the worker is economically dependent on the
employer, then the worker is an employee. If the worker is in business for him or herself (i.e.,
economically independent from the employer), then the worker is an independent contractor.
II.
The Economic Realities Factors Guide the Determination Whether the Worker Is
Truly an Independent Business or Is Economically Dependent on the Employer
To help illustrate how the economic realities factors should be properly used to determine
whether a worker is truly in business for him or herself, each factor is discussed in detail below.
The distinction between workers who are economically dependent on employers and the
narrower subset of workers who are truly independent businesspersons must not be eclipsed by a
mechanical application of the economic realities test. The analysis whether the factors are met
must focus on whether the worker is economically dependent on the employer or truly in
business for him or herself. As a district court held in an enforcement action by the Department:
These factors are to be considered and weighed against one another in each situation, but
there is no mechanical formula for using them to arrive at the correct result. Rather, the
factors are simply a tool to assist in understanding individual cases, with the ultimate goal
5