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Labor Regulations Expose Employers to FLSA Overtime Penalties

The Wage and Hour Division of the US Department of Labor proposed new regulations (Administrator's Interpretation No. 2015-1), which, if implemented, will vastly expand the number of employees who must be paid on an hourly basis under the Fair Labor Standards Act (FLSA). According to the new regulations, the Department believes that there has been a dramatic expansion of misclassification of individuals as independent contractors in an effort to avoid payment of taxes and avoid compliance with labor laws.

In an effort to minimize these misclassifications, the Department has proposed an "economic realities" test to determine whether an individual is properly considered an employee or an independent contractor. Under this test, the Department will not focus on the level of control exercised by the business or how that individual is classified, but instead whether, as a matter of economic reality, the individual is "in business for himself" or is "dependent upon finding employment in the business of others." Factors that the Department will consider in determining the proper classification under the "economic realities" test are: (a) Is the work and integral part of the employer's business? (b) Does the worker's managerial skill affect the worker's opportunity for profit or loss? (c) How does the worker's relative investment compared to the employer's investment? (d) Does the work performed require special skill and initiative? (e) Is the relationship between the worker and the employer permanent or indefinite? (f) What is the nature and degree of the employer's control?

There have been a number of recent press reports regarding aggressive steps that the Department is taking to avoid such misclassifications. If you are a business seeking advice on how to properly classify a worker, or an individual seeking to determine whether there is a problem with how you have been classified by the entity for whom you perform services, it is critical that you seek legal advice to sort through these complex issues. 

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