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.

EEOC Publishes Strategic Enforcement Plan for Fiscal Years 2017-2021

By Martha J. Zackin

EEOC recently published its Strategic Enforcement Plan (SEP) for Fiscal Years 2017-2021, in which it outlines the areas in which it intends to focus its strategic litigation and enforcement activities in the coming years.  Not surprisingly, the EEOC indicates that it intends to expend significant resources on understanding and protecting temporary employees and members of the gig workforce.

As described in the SEP, EEOC’s substantive priorities for Fiscal Years 2017-2021 are: Read more

Joint Employment: DOL Issues Adminstrator’s Interpretation

By Martha J. Zackin

The legal concept of joint employment has been around for many years, first gaining national prominence in 1996, after a federal appeals court found Microsoft to be a co-employer of thousands of workers classified either as “contractors” or “temporary employees” retained through a staffing company.  The case, Vizcaino v. Microsoft,, 97 F.3d 1187 (9th Cir. 1996), ultimately settled for $97 million dollars.

In 2015 the National Labor Relations Board weighed in, with Browning-Ferris Industries of California, Inc., 362 NLRB No. 186.  As described in a press release describing the BFI decision, the NLRB will now find two or more entities to be joint employers of a single workforce if “(1) they are both employers within the meaning of the common law;  and (2) they share or codetermine those matters governing the essential terms and conditions of employment.”  In evaluating joint employment status, the NLRB considers whether an employer has exercised control over terms and conditions of employment indirectly through an intermediary, such as a staffing company.  Remarkably, with BFI, the NLRB will find joint employment even where a company has not actually exercised control, but has merely “reserved the authority to do so.”

 

Multiple federal courts also joined the discussion in during 2015, with both the Third and the Fourth Circuit Courts of Appeals finding staffing buyers to be joint employers with the staffing companies whose workers performed the services.   Although the tests applied by the courts were slightly different, the courts in both Butler v. Drive Automotive, 793 F.3d 404 (4th Circuit 2015) and Faush v. Tuesday Morning, Inc., (3rd Circuit 2015) focused on the staffing buyers’ right to control the manner and means by which the work was performed.

Today, the Department of Labor offered its view on joint employment, issuing Administrator’s Interpretation No.  2016-1.  Not surprisingly, the DOL advocates an expansive definition of joint employment “to ensure that workers receive the protections to which they are entitled.”  Within the Administrator’s Interpretation, the DOL introduces the concepts of “horizontal joint employment” and “vertical joint employment.”  According to the DOL, both “horizontal” and “vertical” joint employment 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.”  With “horizontal” joint employment, an employee may be employed by two companies that share operations.  The “vertical” joint employment relationship is akin to the traditional staffing relationship, where a business obtains workers through an arrangement with an intermediary employee.

With the Administrator’s Interpretation, the DOL also published a blog entry, along with FAQ’s graphic illustrations of “horizontal joint employment” and “vertical joint employment.”

A broad standard of joint employment will have a significant impact on many businesses.   For example, entities deemed to be joint employers may find themselves liable for actions taken by their contractors and suppliers, if those contractors and suppliers are deemed to be joint employers.  Moreover, under the expansive definition described above, non-unionized employers found to be joint employers of unionized entities may find themselves subject to collective bargaining obligations.  Small businesses and franchise owners may be responsible for medical care under the Affordable Care Act, among other laws, if their employees are grouped together and counted with the employees of their co-employers.

Stay tuned for further developments.

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

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

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.