DOL Signals Loosening in Regulatory Stance on Independent Contractor Misclassification and Joint Employer Liability

Alexandra D. Thaler and Justin Engel

The federal Department of Labor signaled this week that it is reversing course on Obama-era policies that had resulted in the risk of expansive employer liability with respect to worker classification and joint employment.  The DOL’s withdrawal of two controversial guidance documents from 2015 and 2016 is one in a series of steps indicating that the Trump administration seeks to make good on campaign promises to loosen regulations on employers.

In 2015 the DOL had articulated its view of the definition of an employee under the Fair Labor Standards Act in the context of independent contractor misclassification.  In an informal guidance known as an Administrator’s Interpretation (AI), the DOL reviewed the application of the so-called “economic realities” test used to determine whether a worker is an employee or an independent contractor.  This multi-factor test is much broader than the common law “control” test, and as a result it sweeps more relationships under the label of “employment.”  The DOL thus concluded that application of the test results in the finding that “most workers are employees under the FLSA.”  Although the DOL purported to rely on established precedent in reaching this conclusion, its clear message to employees and businesses was that the Department would take the broadest possible view of employment relationships in investigation and enforcement proceedings going forward.  Accordingly, the withdrawal of the guidance sends the message that the DOL will be softening its stance on this issue.

As we wrote at the time, in a subsequent Administrator’s Interpretation issued in early 2016, the DOL advocated an expansive definition of joint employment.  The DOL asserted that joint employment could be either “horizontal” or “vertical,” and may exist when “an employee is employed by two (or more) employers and the employers are responsible, both individually and jointly, for that employee under the law.”   While the AI’s description of “horizontal” joint employment largely conformed to the established approach, which looks to the common law “control” test to determine whether an employee is sufficiently controlled by two or more employers for joint employment to arise, the DOL’s definition of “vertical” joint employment represented a significant departure from this precedent.  According to the guidance, “vertical” joint employment “exists where the employee has an employment relationship with one employer (typically a staffing agency, subcontractor, labor provider, or other intermediary employer) and the economic realities show that he or she is economically dependent on, and thus employed by, another entity involved in the work.”  By announcing that vertical joint employment status should be evaluated using the multi-factor “economic realities” test, the DOL clearly intended to broaden the circumstances in which employers could be found jointly and severally liable for FLSA violations.  Thus, the DOL’s withdrawal of the 2016 AI signals a return to the narrow common law focus on control as the touchstone for determining whether joint employment exists.

While it remains to be seen what specific impact the withdrawals of these interpretations will have, employers that had been wary of the Obama administration’s broad pronouncements in the area of wage and hour enforcement, and business groups that had urged the withdrawal of these interpretations, will welcome this change.   These and other recent announcements—including the proposed 2018 federal budget, which contains a dramatic 21% funding cut for the DOL and proposes the merger of the OFCCP into the EEOC while also significantly cutting the OFCCP’s budget—may mean that the regulatory landscape for employers will experience significant loosening in the months and years to come.  However, it is important to keep in mind that other regulatory or even Congressional action in other areas relating to the employer-employee relationship (most notably a possible increase to the minimum salary requirement for exempt employees on which the DOL will soon solicit public comment once again, according to a recent statement by Labor Secretary Alexander Acosta), may yet result in significant impact on businesses and individuals.

DOL Overtime Rule Stopped: Nationwide Injunction Issued by Texas Judge

In a last-minute, and therefore surprising, decision issued today, a Texas Federal District Court judge has blocked enforcement of the revised federal overtime rule set to become effective December 1, 2016.  The rule, issued by the federal Department of Labor, would require employers to pay a salary of at least $913 dollars per week (equivalent to $47,476 per year), to most employees treated as exempt from overtime pay under the Fair Labor Standards Act, a significant increase over the current $455 per week ($23,660 annually).  The ruling came in response to cases filed in the last several weeks by certain groups of states, and the decision to issue the injunction has surprised some commentators.

Despite being issued by a single Texas trial court judge, the injunction ostensibly has nationwide effect, and completely prevents the DOL from enforcing the revised rule, just days before it was scheduled to take effect.  It remains to be seen whether an immediate appeal will follow, and ultimately whether the injunction will be upheld.  Employers that have not already implemented changes to employee pay or classifications will need to make decisions regarding whether to go ahead with changes in the face of this uncertainty.  We will continue to provide updated analysis and will be available in the coming days to discuss these developments with any clients seeking guidance in making these decisions.

 

Update on DOL changes to FLSA White Collar Exemptions

By Alexandra D. Thaler

As we previously reported here, the Department of Labor will soon be revising the so-called “white collar exemptions” to the Fair Labor Standards Act (FLSA).  Recently, the DOL has indicated that it now plans to issue the Final Rule in July 2016.

To recap, on June 30, 2015, the DOL issued a detailed report and proposed rule, inviting the public to submit comments through September 4, 2015.  The agency has received nearly 300,000 comments to date, underscoring the intense interest the proposed changes have garnered across diverse stakeholder groups. Read more

State Wage Penalties Available for Non-Payment of Federal Overtime

By Kenneth M. Bello and Louise Reohr

A recent case highlights the need for Massachusetts’ employers to tread carefully around the so-called Wage Act, M.G.L. c. 149, § 148.  Under this law, an employee who successfully makes out a claim for non-payment of wages “shall be” awarded automatic treble damages together with litigation costs and attorneys’ fees.  Unlike the FLSA which permits the award of double damages as a liquidated remedy, the treble damages provision of the MA Wage Act is automatic, regardless of any good faith by the employer.  While there remain arguments automatic treble damages is an unconstitutional punitive remedy, to date there is no definitive state court ruling on such a challenge.  Read more

DOL Issues Misclassification Guidance Broadly Defining “Employee”

By Martha J. Zackin

On July 15, 2015, the Wage and Hour Division of the Department of Labor issued guidance aimed at clarifying the distinction between “employees” and “independent contractors.”   Published as an Administrator’s Interpretation, the DOL states that in its view, “most workers are employees under the Fair Labor Standards Act” (FLSA).  The Administrator’s Interpretation also states that its analysis and the broad definition of employee it espouses also applies to certain other federal laws, specifically referencing the Family and Medical Leave Act.   Importantly, the DOL announced a “misclassification initiative,” pursuant to which it has entered into numerous memorandum of understanding with states and the IRS to combat what it perceives as a significant, nation-wide problem of misclassification that deprives workers of important protections such as minimum wage, overtime compensation, unemployment insurance, and workers’ compensation. Read more

DOL Issues Proposed Updates to FLSA White Collar Exemptions

By Alexandra D. Thaler

On June 30, 2015, the Department of Labor issued its anticipated update to the so-called “white collar exemptions” to the Fair Labor Standards Act (FLSA).   The proposed rule more than doubles the minimum weekly salary threshold for the application of the Executive, Administrative, Professional, and Computer Employee overtime exemptions, and ties the rate to annual data on national wages for full-time salaried employees.  The rule would increase the minimum salary for exempt employees from the current $455 per week, or $23,660 annually, to an estimated $970 per week, or $50,440 annually when the final rule issues, likely in 2016.  The proposed rule would also increase the minimum compensation required to qualify for the Highly Compensated Employee exemption, from $100,000 to $122,148 annually based on current data, also tethered to annual wage rates.  The regulations do not change the optional hourly payment method for qualifying computer employees, which would remain at $27.63 per hour and would not be tied to changes in national wage data.

While the proposed rule does not currently include changes to the duties tests that also must be met for each exemption, in its 285-page statement accompanying the draft rule, the DOL advises that it is considering possible changes to the duties tests, and invites comments on these and other aspects of the exemptions.  For example, the DOL seeks comment on whether the duties tests “are working as intended to screen out employees who are not bona fide” exempt employees, specifically, whether employees should be required to spend a minimum amount of time performing “primary duty” work, whether the single standard duties test for each category is appropriate, and whether the “concurrent duties” regulation should be modified to prevent exempt-classification of otherwise nonexempt employees.  The Department also seeks comments on various other issues relating to the exemptions, including whether the national wage data methodology is appropriate, whether employers should be permitted to credit certain payments, such as non-discretionary bonuses and commissions, toward the salary requirement, and whether any additional occupational titles or categories should be included in the regulations regarding computer and information technology sectors.

In the short term, the rule is expected to affect nearly 5 million workers who currently make less than the proposed $50,440 annual salary threshold.  Still more will be impacted by the increase in the Highly Compensated Employee salary level.  The ultimate impact of the new rule remains unclear, with some economists predicting that workers’ hours, and ultimately wages, will go down to compensate for the changes.   The DOL will accept the public’s comments on the proposed rules, which can be submitted in writing or online until September 4, 2015.  All comments are made available online at http://www.regulations.gov.

HR Manager’s Remarks Regarding Nature of Hiring Process May Help Employee Establish Discrimination Case

Written by Alexandra D. Thayer (posted by Martha Zackin)

On November 12, the Payroll Fraud Prevention Act of 2013 (S. 1687) was introduced in the United States Senate.   The bill, which would amend the Fair Labor Standards Act, seeks to impose new rules and penalties relating to misclassification of employees as independent contractors.  The changes would apply to all entities covered by the FLSA, including those that do not use independent contractors or other “non-employees.”

Although the Payroll Fraud Prevention Act would not prohibit the use of properly classified independent contractors, the bill would make it unlawful to “wrongly classify an employee . . . as a non-employee,” even if the misclassification is unintentional and made in a good faith attempt to comply with the law.  If passed as currently written, the bill would:

  • Impose treble damages for misclassification when the misclassification is combined with a violation of the minimum wage or overtime pay requirements of the FLSA;
  • Require every entity covered by the FLSA issue a classification notice to all workers, informing them of their status as an “employee” or “non-employee,” and directing them to the Department of Labor for guidance.   Failure to provide the required notice would result in penalties of up to $1,100 for each individual who did not receive notice.  This penalty would increase to up to $5,000 per individual for a second offense or a willful violation;
  • Authorize the Secretary of Labor to report misclassification information to the IRS, impose additional penalties upon employers that misclassify employees for unemployment compensation purposes, and conduct targeted audits within certain industries.

The issue of misclassification continues to be front and center for many lawmakers and regulators at both the state and federal levels.  Bills similar to the Payroll Fraud Prevention Act of 2013 have been repeatedly introduced in Congress since 2010, and numerous states have recently passed or introduced legislation specifically addressing misclassification.  The IRS and DOL are also actively pursuing employers in industries in which misclassification is viewed as prevalent.

Although in the current atmosphere of partisan gridlock on Capitol Hill the proposed bill is likely to face significant push-back, the issue of “misclassification” has been in the forefront for lawmakers and regulators in recent years and is unlikely to go away soon.  The broad scope of S. 1687 means employers will be well served to stay on top of this legislation should it move forward through Congress.