States Targeting Employee Misclassification

Last week, the U.S. Department of Labor’s (DOL) Wage and Hour Division issued guidance regarding the misclassification of employees as independent contractors under the Fair Labor Standards Act (FLSA). According to the DOL, employee misclassification occurs when workers who fit the definition of employee are designated as independent contractors, barring them from receiving benefits like overtime pay, unemployment insurance, and workers’ compensation. The DOL contends misclassification results in foregone tax revenue and workers not receiving benefits they would be entitled to as employees. The new guidance uses case law and examples from the workplace to illustrate how employers can be compliant with the “economic realities” test to determine whether a worker is an employer or contractor. Though the test includes several factors, the central question is whether a worker economically depends on an employer (an employee) or is using his skills in business for himself (independent contractor). Overall, the guidance suggests that more workers should be classified as employees under the FLSA and will make it more difficult for employers to classify workers as independent contractors.

The focus on employee classification has intensified in recent years as the “sharing economy” has grown and companies like Uber, a transportation network service, have begun to rely on contractors. In June, the California Labor Commission ruled that an Uber driver was an employee, not independent contractor, and therefore Uber is responsible for paying the driver's reimbursable expenses. While the ruling only applies to the particular driver that brought the case and Uber is currently appealing, the ruling could set a precedent and lead to the misclassification of thousands of Uber drivers in California. Additionally, FedEx recently lost a legal dispute in Kansas when the Seventh Circuit Court of Appeals sided with the Kansas Supreme Court and ruled that 500 FedEx drivers should have been classified as employees. Last month, FedEx agreed to pay $228 million to settle a lawsuit with drivers in California.

Several states this year have introduced legislation aimed at clarifying the definition of independent contractor and establishing employee misclassification task forces. Currently, legislation is pending in North Carolina (NC SB 694) that would create an Employee Classification Division to investigate companies accused of misclassifying employees and establishes fines for offenders. Given the highly publicized court decisions against Uber and FedEx along with the recent DOL guidance, it is likely that even more states will begin to take action on the issue in 2016.