Labor Department guidance on worker classifications could cast wide net

A U.S. Department of Labor position paper recently released on the issue of worker classification could have far-reaching impact on all U.S. industries by effectively making employees out of all U.S. workers, a labor lawyer for a firm with a large transportation practice wrote last week.

At the same time, a partner in the firm's transportation practice counseled clients that the Labor Department paper is not a "death blow" to the independent-contractor model so prevalent in the trucking business. However, the partner, J. Allen Jones III of Benesch, said the new DOL guidance should motivate businesses to focus more intently on contract language that governs their behavior toward contractors.

The 15-page memo, issued July 15 by Dr. David Weil, a Boston University economist and the nation's first permanent wage-and-hour administrator, said that under the Fair Labor Standards Act (FLSA), which governs minimum wage, worker overtime, and child-labor laws, an "economic realities" test should be applied to determine whether a worker is an employee or a contractor. Most legal rulings to determine worker classification generally center on the degree of control a company exercises over a worker.

Weil's opinion, which is designed to guide labor-law interpretation and is not binding, said the "economic realities" test would consider a worker to be an employee if the worker is economically dependent on the company. By contrast, a worker is a contractor if that worker is in business for himself or herself, according to the memo. The document listed six factors to guide the determination. Among them is to what extent the work performed is integral to the employer's business, whether the worker's opportunity for profit or loss depends on managerial acumen, and the extent of the investments made by the company and the worker. Included on the list is the degree of control held by the company over the worker.

Business interests, and the attorneys that support them, said the memo could make it harder for companies to prove that workers are independent contractors and not employees. They believe that it is part of an Obama-administration strategy to undermine the classification of workers as independent contractors. The Internal Revenue Service (IRS) and state tax agencies are keenly interested in the issue as they know worker reclassifications would mean more income in their coffers; they are looking for more payroll-tax income. The IRS is active in employee reclassification efforts; as employees, workers would be unable to employ the same sorts of tax-avoidance tactics that are abundantly available to them as contractors.

Rick Hepp, an associate with Cleveland-based Benesch's labor and employment practice group, said Weil's memo makes it clear that, in DOL's eyes, most U.S. workers should be classified as employees and not contractors. The memo's language interprets the FLSA's definition of employment so broadly that "almost every worker in the United States will be considered an employee," Hepp wrote in a note last week.

A key byproduct of the memo's language is that employee classification could be determined by the level of economic dependence a worker has on the employer, not on an analysis of the worker's status. The memo also breaks new ground in employee classification by establishing a set of factors to determine if a worker is an employee or a contractor, rather than relying on the singular "control" issue, Hepp wrote. He advised firms that use independent contractors to ensure their business models align with the new interpretation.

However, Jones said that companies don't need to alter their models as a result of the memo. The memo only provides guidance and does not have the force of law, he wrote in a separate note. "For the majority of mainstream trucking companies, the memo poses no new challenge," Jones wrote, adding that it might result in heightened scrutiny of the parcel segment, which has experienced recent adverse court rulings over the issue. "At the very least, the memo calls for increased awareness of the 'do's and don'ts' when operating with independent contractors/owner-operators," Jones wrote.

Any change in the Labor Department's interpretation of employee-classification issues would be of paramount importance to transport and logistics companies, notably truckload carriers and parcel companies. It is believed that about 30 percent of all independent owner-operated truckers are engaged in long-term agreements with big motor carriers.

In the parcel industry, FedEx Ground, the ground and home-delivery unit of Memphis-based FedEx Corp., has seen its long-time use of independent, contracted drivers challenged in recent years. In June, the unit agreed to pay $228 million to settle claims by about 2,300 drivers in California that the company improperly classified them as independent contractors and not company employees while they drove for the unit from 2000 to 2007. In early July, the Seventh Circuit Court of Appeals upheld a Kansas Supreme Court ruling that 479 FedEx Ground drivers were employees and not contractors.