On July 15, 2015, the Administrator of the Department of Labor’s Wage and Hour Division (WHD) provided additional guidance on the application of the rules to determine who is an employee under the Fair Labor Standards Act (FLSA). The goal of the guide is to help the regulated community classify workers and decrease misclassification. The Administrator’s Interpretation reviews the relevant FLSA definitions and the breadth of employment relationships covered by the FLSA. The Administrator’s Interpretation then addresses each of the factors in the “economic realities test.”

According to the Administrator, in determining whether a worker is an employee or an independent contractor, the application of economic realities factors should be guided by the FLSA’s statutory directive that the scope of employment is very broad. The FLSA definitions establish the scope of the employment relationship under the Act and provide the basis for distinguishing between employees and independent contractors.

The Supreme Court and the Circuit Court of Appeals have developed a multifactor “economic realities” test to determine whether a worker is an employee or an independent contractor under the FLSA. The test focuses on whether the worker is financially dependent on the employer or on the business itself. Factors include:

1. The extent to which the work performed is an integral part of the employer’s business.
2. The opportunity of profit or loss of the worker according to his managerial ability.
3. The measure of the relative investments of the employer and the worker.
4. If the work performed requires special skills and initiative.
5. The permanence of the relationship.
6. The degree of control exercised or retained by the employer.

In completing the analysis, no single factor is determining. Each factor is examined and analyzed in relation to the others. According to the guidance, the factors should not be applied mechanically, but rather with the understanding that the factors are indicators of the broader concept of economic dependency. “The factors are a guide in making this final determination of economic dependency or independence.”

Correctly structuring the relationship between companies and workers within the healthcare industry is especially important for both tax and compliance reasons. For example, after an audit, the IRS may find that an agreement between a group practice and an independently contracted physician is actually an employment relationship because the employer has complete control over when and where the physician performs and the agreement is be the sole source of the doctor. In that case, the employer would be subject to payment of back employment taxes and interest on those unpaid taxes.

Additionally, relationships that are subject to the Bribery Act or Stark Law are often built to comply with the relevant exceptions or safe harbors of those laws. The criteria for full compliance with any applicable exceptions differ for employees and independent contractors. For example, a part-time vendor with a relationship structured to fit within the Anti-Bribery Statute’s safe harbor for bona fide employees could be determined to be an independent contractor whose relationship falls outside the safe harbor for personal services.

Several states have also issued their own guidance regarding whether a worker should be classified as an employee or an independent contractor. For example, the New York State Department of Labor website contains information on the distinction between independent contractors and employees. It is important that each business proposing to employ or hire a worker understands not only federal guidance, but also state-issued guidance, if applicable.