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.