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States Hopping on the Department of Labor’s Misclassification Bandwagon


States Hopping on the Department of Labor’s Misclassification Bandwagon

On August 31, 2016, North Carolina became the latest state to join the U.S. Department of Labor’s (“DOL”) expansive efforts to reduce the misclassification of employees as independent contractors—making it the 33rd state participating in the DOL’s collaborative effort to reduce what it views as rampant misclassification.  Through its administrator’s interpretation, the DOL has issued guidance in its renewed efforts to combat misclassification. The DOL's initiative is a concerted effort to investigate and pursue companies that misclassify employees as contractors to avoid various tax and/or benefit burdens. The initiatives have resulted in a significant number of companies being investigated by the DOL and the payment of significant back pay amounts to employees. Several states have formally adopted the DOL’s heightened scrutiny in this area and have agreed to work closely with the feds to reduce misclassification, thereby raising the stakes for employers who utilize these arrangements.

The DOL’s interpretation emphasizes that the scope of employment is expansive under federal law. As such, the DOL will generally view workers with a presumption in favor of finding that independent contractors are misclassified, while using a multi-factored “economic realities” test to reach a conclusion. Under the economic realities test, the six most common factors include (1) whether the work is an integral part of the employer’s business; (2) whether the worker’s managerial skill affects the worker’s opportunity for profit or loss; (3) the worker’s relative investment compared to the employer’s investment; (4) whether the work requires special skills; (5) whether the relationship is permanent or indefinite; and (6) the nature and degree of control exercised by the employer.

The DOL’s position and state enforcement efforts leaves businesses with great difficulty in classifying workers as independent contractors. Businesses who continue to classify workers as independent contractors will be open to increased litigation and enforcement given the ambiguous guidance. Employers are well-advised to review the status of all independent contractors under this more restrictive analysis given the renewed enforcement efforts by state and federal agencies.