The key word is “suffer.”
Government contractors already face painful compliance burdens associated with the Fair Pay and Safe Workplaces Executive Order, the proposed implementing regulations, and the Labor Department’s “Guidance” amplifying the proposed regulations. Last week, the Department added another layer of complexity when it issued an Administrator’s Interpretation of the Fair Labor Standards Act. (Covington’s Employment group analyzed the Interpretation here.) The fifteen-page Interpretation stems from the Department’s conclusion that companies are increasingly misclassifying employees as independent contractors. It explains the Department’s view that the statutory definition of employ (“to suffer or permit to work”) informs the distinction between those classes of workers. We hate to spoil an ending, but the bottom line is clear: “most workers are employees.”
The Interpretation applies across a broad range of industries, but it presents special issues for government contractors. Federal contracts in excess of $500,000 trigger obligations under the Paycheck Transparency provisions (section 5) of the Executive Order. The proposed regulations require employers with covered contracts to provide each worker whom they classify as an independent contractor with “a document … informing the individual of that status.” Contractors must look elsewhere for guidance on format and content of the document.
The Guidance expands on the format requirements. First, the “document”—as the term suggests—must be written. An employer may deliver it electronically if the employer “regularly provides documents to its workers by electronic means [and] the worker can access it through a computer, device, system, or network provided or made available by the [employer].” Second, the document must be a stand-alone notice; that is, “separate from any contract entered into” with the worker. Third, and somewhat at odds with the second requirement, the notice is specific to each contract. Even if a worker performs the same type of work under two or more contracts, he or she must receive a new notice before starting work under each contract.
The Guidance’s final point might tempt contractors to pay little attention to the notice’s content: “The Department will not consider the notice when determining whether a worker is an independent contractor or employee.” Nevertheless, contractors should strongly consider drafting notices that carefully and individually analyze the key factors that inform their classification decisions. The Interpretation recites some of the most common factors derived from the case law: the employer’s degree of control; the nature of the work; the worker’s performance-based opportunities for promotion, gain, or loss; the requirements for “special skills and initiative”; and the duration of the employment relationship.
Why spend time on a document that the Department appears to consider irrelevant? The Guidance and the Interpretation suggest a few reasons.
- As a threshold matter, the Interpretation forces employers into a defensive position with its presumption that “most workers are employees.” A boilerplate notice to independent contractors offers no protection to employers. A thoughtful and detailed notice, on the other hand, may at least keep the Department’s investigative wolves at bay. A company that invests in a careful analysis of its workforce is less likely to become a target for allegations that it has deliberately misclassified its workers.
- Next, if a contractor experiences an incident that must be reported under the Executive Order’s disclosure provisions, that contractor could cite its practice of issuing detailed notices as a mitigating factor during the integrity and business ethics determination. According to the Guidance, the “good faith and reasonable grounds” mitigating factor can “apply where the contractor’s … legal obligations are unclear, such as when a new statute, rule, or standard is first implemented.” An employer that documents independent contractor classifications in detail, using the factors identified in the Interpretation, would have a strong argument that it had made a good-faith effort to comply with the law.
- Finally, employers should bear in mind that the Interpretation itself is not law. It is sub-sub-regulatory guidance—potentially persuasive and certainly indicative of the Department’s most likely litigation position—but it does not bind a court. An employer facing allegations of misclassification can go to court armed with a much more robust record if it provides evidence documenting its careful analysis of independent contractor relationships.
Misclassification is a serious and growing risk in many contexts, as our colleagues in Covington’s Employee Benefits practice have explained. The Administrator’s Interpretation is unwelcome news for companies that rely on a large independent contractor workforce, but government contractors can use the Interpretation as a guide to design notices that may have valuable defensive uses. Some suffering in the near term might prevent significant long-term pain.