The Labor Department issued a broad and potentially far-reaching guidance Wednesday saying that most employers could no longer get away with calling workers "independent contractors" as a way of skirting the federal wage and law hours.
The practice is common in several industries with workers such as taxi drivers, food servers and exotic dancers, among many others, often required to agree to the employer's stipulation that they are contractors. The label means the workers are technically independent business people and thus not direct employees. This releases the employers from many requirements under the Fair Labor Standards Act.
Critics of the practice, led by organized labor, have long complained the label is abused by employers. In Wednesday's guidance, Labor Department Administrator David Weil agreed and said that a new standard would be applied that would place most workers under the act's protection.
"[A]pplying 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," the guidance stated.
The guidance said that when considering whether a worker was really an independent contractor the department would consider factors such as whether the employer is dependent on the worker to properly run their business and whether the worker is dependent on the employer for their livelihood.
"[T]he economic realities of the relationship, and not the label an employer gives it, are determinative," the department said.
A person who runs a cleaning service, for example, would still be an independent contractor because their services are not directly related to what their clients do. But the people who do the cleaning for the service would not be contractors because the manager could do business without them.
The ruling has broad implications for many fields and, while intended to boost workers, could also be problematic for many since it would limit their ability to have flexible schedules. People working second jobs or doing part-time work for extra money would find themselves required to have more formal arrangements with managers.
In a statement issued by the department, Weil argued that abuse of the contract label was too widespread and the rule needed to be updated to address that.
"Imagine working as a drywall installer building houses as an employee one day, but the next day, while performing the same work on the same site for the same company, you're told you are now considered an independent contractor. You didn't suddenly open a business of your own. Nothing about your work changed. But now, you're told that since you're no longer an employee, you're no longer eligible for overtime pay, unemployment insurance, worker's compensation or a host of other benefits that come with employee status," he said
He added that misclassification also results in "substantial losses to the federal government and state governments" from employment-related taxes.