U.S. Labor Department weighs in on how to classify workers

Contractors work at an apartment complex in Raleigh. The construction industry uses many contract workers who should be classified as employees, investigations have found.
Contractors work at an apartment complex in Raleigh. The construction industry uses many contract workers who should be classified as employees, investigations have found.

The Department of Labor has weighed in on when to classify workers as employees and independent contractors, issuing a 15-page memo with new interpretations of the Fair Labor Standards Act.

“Misclassified employees are often denied access to the critical benefits and protections (to which) they are entitled,” the Wage and Hour administrator, David Weil, wrote in a blog post announcing the new interpretation.

The U.S. had 10.3 million independent contractors in 2010, according to the Bureau of Labor Statistics, and with the rise of the so-called gig economy, employers are increasingly relying on contract workers. The trend has been controversial and resulted in high-profile lawsuits against Uber, FedEx, and Handy.

In a five-part series called “Contract to Cheat,” the Observer and the (Raleigh) News & Observer reported in September that the practice of misclassifying employees as contractors is costing the state of North Carolina at least $467 million a year in lost tax revenue from the construction industry alone. Workers were forced to work in limbo, without the protection of workers’ compensation insurance or unemployment benefits.

The new guidelines don’t change the current regulations but help courts and employers understand current laws better. “They (the Department of Labor) are trying to respond to this widespread problem of employers classifying workers as independent contractors when by law they’re employees,” says Samuel Bagenstos, who teaches employment law at the University of Michigan.

The memo includes real-world examples of what constitutes a contractor vs. an employee to illustrate how the Department of Labor interprets the law. In some cases, the distinction between contract worker and full-time employee is subtle.

Below is an example in which the worker is considered an employee:

A worker providing cleaning services for a cleaning company is issued a Form 1099-MISC each year and signs a contract stating that she is an independent contractor. The company provides insurance, a vehicle to use, and all equipment and supplies for the worker. The company invests in advertising and finding clients. The worker occasionally brings her own preferred cleaning supplies to certain jobs.

In this scenario, the relative investment of the worker as compared to the employer’s investment is indicative of an employment relationship between the worker and the cleaning company. The worker’s investment in cleaning supplies does little to further a business beyond that particular job.

The person in the following scenario might not have full- employment status:

A worker providing cleaning services receives referrals and sometimes works for a local cleaning company. The worker invests in a vehicle that is not suitable for personal use and uses it to travel to various worksites. The worker rents her own space to store the vehicle and materials. The worker also advertises and markets her services and hires a helper for larger jobs. She regularly (as opposed to on a job-by-job basis) purchases material and equipment to provide cleaning services and brings her own equipment (vacuum, mop, broom, etc.) and cleaning supplies to each worksite. Her level of investments is similar to the investments of the local cleaning company for whom she sometimes works.

In which of those scenarios do Handy cleaners or Uber drivers best fit? That’s still for the courts and employers to decide. “When the Department of Labor issues this kind of interpretive guidance, employers tend to listen, courts have tended to listen,” Bagenstos says. “It’s important in that way, but it’s not changing the underlying laws.”