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Employers Brace For Scrutiny After Misclassification Memo

Jul 15, 2015 / Media Coverage / Law360 — Aaron Vehling

The U.S. Department of Labor’s new guidance suggesting most workers qualify as employees under the Fair Labor Standards Act could cause misclassification problems for employers, leading to more DOL investigations and enforcement actions and increased private litigation, attorneys say. Outten & Golden LLP partner Justin M. Swartz is quoted.

The U.S. Department of Labor’s new guidance suggesting most workers qualify as employees under the Fair Labor Standards Act could cause misclassification problems for employers, leading to more DOL investigations and enforcement actions and increased private litigation, attorneys say.

DOL Wage and Hour Division head David Weil’s 15-page “administrator’s interpretation,” issued Wednesday, emphasized an expanded reading of the FLSA’s definition of employee and highlighted that certain tests used to determine a worker’s classification have a broader scope than the common-law control test Congress rejected when it drafted the FLSA.

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According to plaintiffs attorney Justin Swartz of Outten & Golden LLP, the memo will help put a stop to management arguing away workers’ FLSA rights.

“It’s an outstanding development for workers, because the agency charged with enforcing minimum-wage and overtime laws has strongly stated its view that those workers are employees,” said Swartz, co-chair of the National Employment Lawyers Association's wage and hour law practice group.

Weil’s classification guidance comes two weeks after the DOL unveiled a proposed rule that would broaden federal overtime pay regulations to cover nearly 5 million more people and more than double the minimum salary threshold required to qualify for a “white collar" exemption under the FLSA.

The guidance highlighted that under the FLSA, the key question is whether a worker is genuinely in business for himself or herself — which makes that worker an independent contractor — or if the worker is economically dependent on the employer. The memo further went on to discuss six “economic realities factors” that guide the assessment.

The factors, which include the nature and degree of the employer's control and whether the work performed is integral to the business, shouldn't be “analyzed mechanically or in a vacuum,” and no one factor should get too much weight, the guidance said, adding that the factors should serve as a road map for determining economic dependence or independence.

The economic realities test used by courts to determine employee versus independent contractor status and the FLSA's "suffer or permit to work” definition have a broader scope than the common-law test, according to the guidance.

Though the guidance doesn’t have the teeth that the DOL’s recent overtime rule has, the message is clear: The agency is going to keep an eye on how employers are classifying their employees, and will punish those who do it wrong.

Behind the scenes, the Wage and Hour Division is ramping up to match Weil’s memo with action. In its recent budget request, the department asked for about $32 million to hire 300 full-time-equivalent enforcement employees and support staff.

“Additional resources dedicated to planned enforcement — as opposed to reactive — would allow the agency to address systemic compliance problems more strategically,” the department’s FY2016 budget request says.

Employers could find themselves in the crosshairs of this empowered department, confused about how to proceed, management-side attorneys say. But there are some options available for employers.

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Swartz seemed optimistic that the courts will give the guidance substantial weight, [...]

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Because Weil’s guidance “expands dramatically” the economic realities test, there could be arguments against deference, he said.

Attorneys also differ on the core issue of whether the guidance breaks new ground.

Swartz and some management-side attorneys all said that what Weil articulated in the guidance wasn’t entirely new — the “suffer or permit” and economic realities tests have been around a while.

Swartz said Weil’s looking at it the “correct” way it’s always been looked at, primarily assessing a number of factors to determine if workers are working for themselves or relying on a company.

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