Why it matters

The new Secretary of Labor officially withdrew the Department of Labor’s (DOL’s) guidance on joint employment and independent contractors, although the agency cautioned in a news release that the removal does not change the legal responsibilities of employers under applicable law. While Administrator’s Interpretation 2015-1 tilted the independent contractor/employee analysis in the direction of finding an employment relationship, with the position that most workers are employees under the Fair Labor Standards Act, Administrator’s Interpretation 2016-1 applied a broader test for joint employment to ensure “that the scope of employment relationships and joint employment under the Fair Labor Standards Act and the Migrant and Seasonal Agricultural Worker Protection Act is as broad as possible,” the DOL explained. The agency noted that it “will continue to fully and fairly enforce all laws within its jurisdiction” as reflected “in the department’s long-standing regulations and case law.” In addition to the withdrawals, Secretary Alexander Acosta announced that the agency is working on other changes, including revisions to the fiduciary rule for retirement advisers as well as the overtime rule.

Detailed discussion

Citing a continuing increase in the misclassification of employees as independent contractors and “numerous complaints from workers alleging misclassification,” the DOL’s Wage and Hour Division released new guidance in 2015, “The Application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who Are Misclassified as Independent Contractors.”

The Fair Labor Standards Act (FLSA) broadly defines “employ” as including “to suffer or permit to work,” and some courts have used a multifactor “economic realities” test when making the determination of whether a worker is an employee or an independent contractor. The result of the application of the test in view of the expansive definition of “employ” found in the FLSA: “most workers are employees,” the DOL said.

Administrator’s Interpretation 2015-1 provided examples and explanations for each of the six factors found in the economic realities test (including whether the work performed by the worker is an integral part of the employer’s business and whether the worker is retained on a permanent or indefinite basis). All the factors must be considered in each case, with no one factor determinative, the agency said, with the goal “to determine whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor).”

Misclassification of independent contractors was a major focus of the DOL during President Barack Obama’s presidency, with the agency partnering with various states and issuing grants of more than $10 million to 19 states—including California and New York—to “enhance states’ ability to detect incidents of worker misclassification.”

Another area of focus for the DOL in the Obama era: joint employment. Last year, noting an increase in joint employment relationships such as the sharing of employees or third-party management companies between two or more employers, the agency provided additional guidance on employees’ rights and employers’ obligations under the FLSA and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA).

Administrator’s Interpretation 2016-1 emphasized that the concept of joint employment—like employment generally under the FLSA’s “to suffer or permit to work” standard—should be interpreted as broadly as possible, rejecting the common-law right of control standard.

The DOL set forth two concepts of joint employment: horizontal joint employment (when two or more employers each separately employ a worker and are sufficiently associated with or related to each other with respect to the employee) and vertical joint employment, where the employee of the intermediary employer is also employed by another employer.

Examples of horizontal joint employment may include separate restaurants that share economic ties and have the same managers controlling both restaurants, or home healthcare providers that share staff and have common management. Vertical joint employment can often be found where a construction worker who works for a subcontractor is also employed by the general contractor, or a farmworker who works for a farm labor contractor is also employed by the grower, the DOL said.

With little fanfare, Secretary of Labor Alexander Acosta announced the withdrawal of both Administrator’s Interpretations. “Removal of the administrator interpretations does not change the legal responsibilities of employers under the [FLSA] and the [MSPA], as reflected in the department’s long-standing regulations and case law,” the agency stated in a press release. “The department will continue to fully and fairly enforce all laws within its jurisdiction, including the [FLSA] and the [MSPA].”

Without the guidance, courts will likely revert to prior interpretations of the FLSA and MSPA with regard to independent contractor classification and joint employment.

Acosta followed up the removal by indicating that the agency is also considering changes to the fiduciary rule for retirement advisers as well as the overtime rule.

The fiduciary rule, also introduced by the Obama administration, states that financial professionals who advise on retirement accounts must act in their clients’ best interests when recommending investment products—a higher standard of accountability than previously required. Acosta pushed out the fiduciary rule’s effective date by 60 days, from April until June.

Testifying before the House Appropriations Labor, Health and Human Services, Education, and Related Agencies Subcommittee, Acosta said the DOL has asked for feedback from stakeholders on the fiduciary rule, with a request published by the White House Office of Management and Budget. A similar invitation for comment will be forthcoming on the overtime rule, he added.

“That is the first step in this administration’s review of that rule,” Acosta told lawmakers. “We need that info, and we need that data in order to decide how to proceed.”

To read the DOL’s press release about the withdrawal, click here.