http://www.wsj.com/articles/labor-department-releases-guidance-on-classification-of-workers-1436954401

Labor Department guidance comes amid confusion over how to distinguish employees, independent contractors
Classification of workers has become an important topic as hundreds of growing businesses such as Uber turn increasingly to contract workers. ENLARGE
Classification of workers has become an important topic as hundreds of growing businesses such as Uber turn increasingly to contract workers.
By MELANIE TROTTMAN
Updated July 15, 2015 3:38 p.m. ET
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The Labor Department has waded into a heated workplace issue with fresh guidance on how businesses should distinguish between employees and 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 turn increasingly to contract workers.

On Wednesday, the administrator of the Labor Department’s Wage and Hour Division set out to address the confusion by officially releasing a 15-page memo of guidance—the division’s first on the topic since President Barack Obama took office.

Labor Secretary Thomas Perez has called misclassification a serious problem that not only deprives workers of overtime pay and benefits, such as unemployment insurance, but also undermines state and federal tax collections.

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Administrator’s Interpretation
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 regulations that they say can lead to government overreach.

The Wage and Hour administrator, David 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 regulations under the Fair Labor Standards Act. The memo includes examples of real-life workplace situations and tries to address misconceptions about how to follow the law.

“We think we can provide greater clarity to the employer community, in particular, but I think it is important for employees” to also be clearer about how the Labor Department interprets current law, Mr. Weil said in an interview Tuesday night. “Courts have used this kind of guidance in setting opinion,” he said, but they aren’t bound by it.

The guidance seeks to clarify that under the Fair Labor Standards Act, the definition of employee is broader than what some employers might interpret it to be. The language in the memo could prompt employers to accuse the administration of trying to tighten the policy that determines when someone is called an employee.

Some recent high-profile lawsuits have accused companies such as Uber and FedEx Corp. of misclassifying workers. Both companies have recently settled big cases or lost, and Uber is appealing one decision. FedEx settled in California but continues to challenge lawsuits alleging misclassification in other states.

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 Department said.

Many companies in the construction, technology and other industries have said they classify workers as independent contractors because they need the workers’ skills on demand instead of full time.

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. But sometimes employers put too much emphasis on the control factor when making a determination about how to classify a worker, Mr. Weil said.

“The ‘control’ factor should not play an oversized role in the analysis of whether a worker is an employee or an independent contractor,” the agency says in its new guidance. “The factors should be considered in totality to determine whether a worker is economically dependent on the employer, and thus an employee,” according to the memo.

Mr. Weil said worker misclassification is growing in many industries, including construction, while spreading to new ones such as the janitorial and auto-retailing industries.

As regulators and courts have stepped up their scrutiny of worker classification, employers have found new ways to move workers from formal payrolls to lower costs.

Write to Melanie Trottman at melanie.trottman@wsj.com