The Labor Department waded into a heated workplace dispute with fresh guidance suggesting more businesses should be designating workers as employees instead of independent contractors.
So-called employee misclassification has become a hot topic recently as the economy has changed and hundreds of growing businesses such as Uber Technologies Inc. turn away from traditional hiring practices and rely increasingly on contract workers.
On Wednesday, the administrator of the Labor Department’s Wage and Hour Division set out to address the confusion with a 15-page memo of guidance—the division’s first on the topic since President Barack Obama took office. The guidance seeks to clarify that under the Fair Labor Standards Act, the definition of employee is broader than what some employers believe and what some court rulings have determined.
Business leaders cited concerns the government was tilted against employers turning to independent contractors.
“The guidance is going to make it harder to classify workers as independent contractors,” said Beth Milito, senior executive counsel of the National Federation of Independent Business.
Labor Secretary Thomas Perez has called misclassification a serious problem that not only deprives workers of overtime pay and benefits, such as unemployment insurance and workers’ compensation, but also undermines state and federal tax collections. The agency has become more aggressive in targeting certain sectors where it believes the practice is more rampant and workers are more vulnerable.
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The Wage and Hour administrator, David Weil, said worker misclassification is growing in many industries, including construction, while spreading to new ones such as the janitorial and auto-retailing businesses.
As regulators and courts have stepped up their scrutiny of worker classification, some employers have found new ways to move workers from formal payrolls to lower costs, labor officials say.
Employers have clashed with the government about the issue, saying that determining the difference between an employee and an independent contractor can be tricky, in part because of fuzzy guidelines that they say can lead to government overreach.
While the business community had asked for guidance, they said the agency’s insight on Wednesday revealed a one-sided interpretation of the law that will penalize employers’ legitimate use of independent contractors.
The language in the guidance tries to stretch the definition of employee and “essentially declares war on the use of independent contractors in certain industries” such as call centers, construction and janitorial services, said Tammy McCutchen, a former Labor Department lawyer who represents employers on labor issues.
Many companies in the construction, technology and other industries that depend on contract workers have said they classify workers as independent contractors because they need the workers’ specialized skills on demand instead of full time.
Mr. Weil said the new guidance doesn’t amount to a change in policy, which would require more official regulatory steps. Instead, it attempts to provide a more detailed interpretation of how the agency assesses employer compliance with existing law and a long-used “economic realities” test under the Fair Labor Standards Act. The memo includes examples of real-life workplace situations and case law, and tries to address misconceptions about how to be compliant.
The intention, Mr. Weil said, was to provide “greater clarity to the employer community” and workers. He noted that “courts have used this kind of guidance in setting opinion,” but aren’t bound by it.
Generally, businesses are supposed to factor in several so-called “economic realities” when determining how to classify a worker, including the company’s degree of control over the person, whether the work is an integral part of the employer’s business, and whether the relationship between the worker and the employer is permanent or indefinite. These factors are supposed to be used collectively to determine whether the worker is economically dependent on the employer, and therefore an employee, or truly in business for himself or herself as an independent contractor.
Some recent high-profile lawsuits have accused companies such as Uber and FedEx Corp. of misclassifying workers. Both companies have recently settled cases or lost. Uber is appealing one decision. FedEx settled with drivers in California, lost a long-running dispute with nearly 500 drivers in Kansas, and continues to challenge lawsuits alleging misclassification in other states.
“The contrary decisions in the past year were based on a model that no longer is in use,” the company said in a statement, and added that since 2011 FedEx Ground has contracted only with incorporated businesses that treat their drivers as their employees. A FedEx spokesman said the company is still reviewing the Labor Department’s guidance.
A spokeswoman for Uber declined to comment.
In April, the Labor Department announced that a nearly five-year investigation of business practices by 16 defendants in Utah and Arizona resulted in $700,000 in back wages, damages, penalties and other guarantees for more than 1,000 construction industry workers misclassified in the Southwest. The defendants made the construction workers become “member/owners” of limited liability companies, which deprived them of the benefits of employee status, the agency said.
The National Association of Home Builders, the industry’s primary trade association, blasted the new guidance as improperly introduced without public vetting and a boon to labor unions seeking to organize various industries. Unions aren’t allowed to organize independent contractors.
“I’m appalled by the procedures they’re following,” said Jerry Howard, chief executive of the builder association, which has roughly 140,000 members. He said the new guidance puts too much focus on the extent of workers’ economic dependence on a company and that the group will encourage Congress to scrutinize the guidance.