As we have previously noted on this blog, a central aim of the Trump administration was to take aim at—and rescind—Obama-era labor rules. The Trump Department of Labor (DOL) took what was perceived as a consistently pro-business stance, reversing worker-friendly Obama-era rules and issuing new rules favorable to employers. With the proverbial pendulum now swinging back towards worker protections under the Biden administration, two rules with a significant impact on employers are likely to change: independent contractor/employee classifications, and the “joint employer” doctrine.
On March 11, 2021, the DOL announced plans to rescind two Trump-era final rules pertaining to independent contractor/employee classifications and joint employers under the Fair Labor Standards Act (FLSA). The Final Rules provided some much-needed clarity on these ever-changing areas of law, but were criticized as being too employer-friendly.
By way of background, the FLSA requires covered employers to pay employees at least the federal minimum wage for every hour worked and overtime premiums for every hour worked over 40 hours. The two rules currently under fire are particularly important because they determine the applicability of the FLSA. Independent contractors are not afforded the benefits provided by the FLSA. If two companies are found to be joint employers, the companies are jointly liable for minimum wages and overtime pay under the FLSA. Joint employer status is particularly relevant in the context of franchisees, subcontractors, and staffing agencies.
The first Notice of Proposed Rulemaking proposes the withdrawal of the Independent Contractor Final Rule issued on January 7, 2021. This news comes on the heels of the DOL’s announcement that it would delay the effective date of the rule for sixty days, from March 8, 2021 to May 7, 2021.
The Final Rule codifies the “economic realities” test for determining whether someone is an employee or independent contractor. The rule outlines five-factors to be considered when making this determination:
- the nature and degree of the worker’s control over the work;
- the worker’s opportunity for profit or loss;
- the amount of skill required for the position;
- the permanence of the working relationship; and
- and how integrated the worker’s role is to the organization’s overall operation.
The first two factors are the “core factors” and are most probative in determining whether someone is considered an independent contractor or employee.
Overall, the Final Rule looks to determine whether, as a matter of “economic reality,” the worker is dependent on a particular individual, business or organization for work (and is thus an employee) or is in business for him or herself (and is thus an independent contractor). Furthermore, the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
The rule makes it easier for workers to be classified as independent contractors, as it no longer focuses on the control the business has over the work, but rather the worker’s control over his or her work and earnings based upon individual initiative or investment.
The department cited several reasons for proposing the withdrawal of the Final Rule. The agency claimed courts and the department had not used the economic reality test adopted by the rule and that the FLSA text or case law did not support the test. The DOL further claimed the rule would “narrow or minimize other factors considered by courts traditionally; making the economic test less likely to establish that a worker is an employee under the FLSA.”
The second Notice of Proposed Rulemaking aims to rescind a Final Rule on joint employer relationships released on January 13, 2020.
The Final Rule sets forth a four-factor test for determining whether an entity is a joint employer. The court should assess whether the putative joint employer:
- hires or fires the employee;
- supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
- determines the employee’s rate and method of payment; and
- maintains the employee’s employment records.
Under the test, no single factor is dispositive in determining joint employer status; however, the maintenance of employment records alone does not indicate joint employer status.
The rule also clarifies that a joint employer must actually exercise control over the employee. Merely having the ability to exercise control is not sufficient.
The rule narrows the definition of joint employer. The rule states an “employer’s franchisor, brand and supply, or similar business model and certain contractual agreements or business practices do not make joint employer status under the FLSA more or less likely.” The rule also clarifies that an employee’s “economic dependence” on a putative joint employer does not determine whether it is a joint employer.
Unlike the Independent Contractor Final Rule, this rule actually had the opportunity to see the light of day. However, it was already under attack by the time it went into effect on March 16, 2020. In February 2020, several states filed a lawsuit against the DOL in the Southern District of New York claiming the rule violated the Administrative Procedure Act. Last September, the Southern District vacated the majority of the rule, holding the rule was contrary to the FLSA and “arbitrary and capricious.”
The comment period for both the proposed rules will end on April 12, 2021.
While it is not yet known whether DOL will replace these rules, employers should prepare for a more expansive reach of the FLSA under the new administration’s DOL. We previously predicted the Biden administration will likely ramp up enforcement of worker misclassifications and will likely support efforts to establish a standard for independent contractors modeled after the employee-friendly ABC test. Employers should review any current worker classifications and independent contractor agreements. The Biden DOL will also likely expand the definition of “joint employer.” Employers should review any work arrangements that could raise joint employer issues. These areas of law are often complicated and employers are encouraged to reach out to employment counsel for guidance.
Generally, employers beware the ides of March, for when the Biden administration takes aim at employer-friendly rules and regulations, it doesn’t often miss.