As reported on July 27, the U.S. Department of Labor (DOL) has issued an Administrator’s Interpretation (AI) that seeks to drastically limit the ability of businesses to classify workers as independent contractors. The AI is the DOL’s most recent action regarding worker misclassification, which the DOL identified as one of its top three enforcement priorities for 2015.

Given the DOL’s priorities, it is unsurprising that the AI reads like an advocacy piece, with selective legal citations to support the DOL’s seemingly pre-determined conclusion that most workers are employees under the federal Fair Labor Standards Act (FLSA), and therefore cannot lawfully be classified as independent contractors.  The AI will have an immediate impact by guiding DOL investigations and enforcement actions and may serve as an impetus for plaintiffs’ lawyers to pursue more misclassification claims.

The courts will likely determine how much weight, if any, to give the AI’s analysis of the FLSA, which was not subject to the notice-and-comment period typically provided before federal regulations go into effect. If the courts adopt the DOL’s interpretation, the effects will be significant. Many businesses could be liable for damages and fines associated with unpaid overtime, Social Security taxes and unemployment taxes for workers who were initially classified as independent contractors but are later determined to be employees. Employers will also have to deal with compliance issues associated with laws that apply to employees but not independent contractors, such as the Family and Medical Leave Act, the Affordable Care Act and ERISA, which are affected by employee headcount.

In reaching its conclusion that most workers are employees under the FLSA, the DOL examines six factors of the so-called economic realities test. According to the DOL, the economic realities test is applied to determine whether a worker is economically dependent on a business to which the worker provides services—and is therefore an employee—or an economically independent worker operating their own business—and therefore properly classified as an independent contractor.

Although the AI states that no single factor is determinative and every factor must be considered, the AI appears to emphasize the first three of the following six factors to some degree, while de-emphasizing the last factor:

• Whether the work is an integral part of the business
• Whether the worker’s managerial skill affects his or her opportunity for profit and loss
• The relative investments of the business and worker
• Whether the work performed requires special skills and initiative
• Whether the relationship between the worker and the business is permanent or indefinite
• The nature and degree of the business’ control over the worker

Considering the first three factors, the DOL posits that a worker who performs work that is integral to a business is more likely to be an employee—a factor the DOL says the courts have found compelling and one that “should always be analyzed in misclassification cases.” The DOL also considers whether the worker’s managerial skill will affect the opportunity for profit or loss beyond the current job, such as making it more or less likely that the worker will have business opportunities with other parties. Such managerial skill and the actual potential to experience a profit or loss weigh in favor of independent contractor status. Finally, the AI states that “the worker’s investment must be significant in nature and magnitude relative to the employer’s investment in its overall business to indicate that the worker is an independent businessperson.” The DOL may discount a worker’s significant investment in their own business if it determines that the investment of the business using the worker is relatively more significant.

Equally important as the factors the DOL appears to consider more compelling and persuasive are those that the DOL appears to view as either less important or traditionally overemphasized. Perhaps most troubling is the DOL’s view that the degree of control the business has over the worker—a consideration courts and businesses typically give significant weight—“should not play an oversized role.” Examples include a worker’s flexibility in when and where they perform services as well as number of hours worked. When considering control alongside the other factors, the DOL advises that the mere opportunity for control is not a compelling factor for classifying a worker as an independent contractor. Instead, the worker must actually exercise control, and the control must apply to “meaningful aspects of the work” they perform. Moreover, the DOL deems irrelevant the parties’ classification of the relationship as that of an independent contractor and appears to downplay the worker’s skill level and use of skills to obtain more work from the business—as opposed to obtaining more work from other businesses.  The DOL also indicates it will be skeptical of purported independent contractor relationships where the worker continuously or repeatedly works for one business, even if the worker has the option to work for other businesses.

Of particular importance to independent insurance agencies is the potential for the AI to recast the analysis of whether an outside insurance producer can be classified as an independent contractor. This work may be considered an integral part of an agency’s business, and restrictions may be placed on the outside producer’s ability to generate accounts for other agencies—two factors the DOL would likely consider indicative of an employer-employee relationship. Furthermore, outside insurance producers may make a relatively small investment compared to the investment an agency makes. As noted above, considerations such as control, schedule flexibility, the ability to work for other businesses and the parties’ classification of the relationship are likely to hold less sway with the DOL than in the past. Finally, independent insurance agencies should also consider their business clients’ potential exposure to DOL enforcement actions and private misclassification claims, particularly those clients in low-wage industries that have drawn significant scrutiny from the DOL.

Questions regarding worker classification? Contact employment counsel or other competent professionals for questions specific to your agency, or the Big “I” Office of General Counsel for general concerns.

Scott Kneeland is Big “I” general counsel. Joseph Doherty is Big “I” senior counsel.