Wage-and-hour actions under the Fair Labor Standards Act (“FLSA”) are one of the largest growing types of litigation, and have been for over a decade. Pennsylvania businesses may soon experience an increase in FLSA-related litigation, as the Pennsylvania Department of Labor & Industry (DLI) and the U.S. Department of Labor (DOL) signed a “Memorandum of Cooperation” on August 4, 2016 which sets the stage for intensified enforcement of worker classification rules.
The Memorandum is one of many between the DOL and state agencies as part of “The DOL Misclassification Initiative,” which began in 2011 with an agreement between the DOL and the Internal Revenue Service to address the perceived misclassification of certain workers as independent contractors as opposed to employees. The DOL has partnered with more than 30 states through similar agreements to share information and cooperate in the enforcement of the FLSA and state wage-and-hour laws. The DOL’s Wage and Hour Division has also issued memoranda, called “Administrator’s Interpretations,” setting forth the DOL’s interpretation of the differences between employees and independent contractors. These memoranda make clear that the DOL views misclassification as a pervasive problem, and intends to take an aggressive enforcement approach.
The legal determination of whether a worker has been properly classified as an independent contractor is one ultimately made by the courts, not the DOL or the DLI. Normally, whether a worker is called an “employee” or an “independent contractor” does not control. Instead, under the FLSA and Pennsylvania law, this determination is based on numerous factors and looks to the “economic realities” of the relationship between the worker and the employer. Six of the most common factors are:
- whether the work is an integral part of the employer’s business
- whether the worker’s managerial skill affects the worker’s opportunity for profit or loss
- whether the worker’s relative investment compares to the employer’s investment
- whether the work requires special skills
- whether the relationship is permanent or indefinite
- the nature and degree of control exercised by the employer
The Memorandum of Cooperation does not represent a change in the FLSA or Pennsylvania wage-and-hour laws, but should signal to Pennsylvania businesses that worker classification will become an investigation priority for the DLI and the DOL over the next several years. Businesses that rely upon independent contractors as an important part of their workforce—particularly those in the construction, telecommunications, hospitality, janitorial, and health care industries—must be especially diligent in their efforts to properly classify workers.
If a DOL/DLI enforcement action or private litigation results in a determination that a company has misclassified workers as independent contractors, the employer could be subject to paying statutory penalties and attorneys’ fees in addition to back pay in the form of unpaid wages and/or overtime. Therefore, it is critical for employers to review the classification of their workforce and determine whether that classification complies with the FLSA and Pennsylvania law. Taking the time to plan and assess any risks today will help to prevent the headaches of litigation and potentially costly judgments in the future.
Joseph A. McNelis III (LAW ’13) is an associate in the Labor & Employment Department at Fox Rothschild LLP, where he represents clients in wage-and-hour litigation, class and collective actions, and contract disputes. Fox Rothschild is a national firm with more than 700 attorneys in 22 offices coast to coast.