In early June, the Department of Labor rescinded two Guidance documents from the previous Administration's Wage and Hour Division that had explained how the Division would interpret issues of joint employment and independent contractor status. The DOL did not change the law with this retraction, and the court systems in our country have the final say on any litigated claim. However, by rescinding the Guidance documents, the Department has indicated that it will back away from what many believed had become a very aggressive tendency by the Department to find employment relationships between workers and the entities connected to their labor.

The Joint Employer and Independent Contractor Debates

Issues about who, if anyone, is a worker's employer can arise in many contexts. Here are a few examples:

  • when a temporary from a staffing agency complains that a shop manager has harassed her;
  • when questions arise about whether drivers employed by Company should be added together with freight brokers of commonly-owned Company B for the purpose of head-count under any number of laws (Title VII, FMLA, ACA, to name a few);
  • when an employee's obvious employer fails to pay wages and goes out of business, leaving a related entity that could pay; or
  • when a driver is set up as an independent contractor but fails to pay income taxes, and the IRS looks for a source of recovery.

Slowly and generally over recent decades, Congress, the federal agencies, and the court system have tried to spread the effect and protections of workplace laws where they perceive an attempt to structure working relationships to avoid those laws. However, in the past five to ten years, individuals and businesses have looked for more and more ways to be flexible. As a result, the spread of independent contractors, separated operating companies, temporary staffing agencies, and shared pools of workers have pushed the rules on what it means to work and be employed. In turn, lawmakers have been unable, or unwilling, to develop clear rules that provide certainty and predictability around who owes the duties of an employer, if anyone. As a legal matter, it is still far from clear when an independent contractor is really an employee, or when a business that benefits from another entity's laborers is legally an employer of those people.

The 2015 and 2016 Guidance Documents

In 2015, the DOL used its Wage and Hour Division to step into the arena with a basic statement of policy: if the "economic reality" is that a worker gets most of his or her income and spends most of his or her time working for a particular business, then that business is likely to be considered the employer when an issue of independent contractor status arises under wage and hour laws. Rather than depending on a multi-factor test—counting up answers on questions such as who provides equipment and directs the work, when the worker has a profit opportunity, where the work is performed, and a host of other considerations—the DOL said its wage and hour enforcement staff would ask a more basic question: as a matter of economic reality, is this worker dependent on this business? If the answer is yes, then an employment relationship exists.

Again, in 2016, the DOL issued a separate policy statement that moved in the same direction. It stated that when one entity exercises even indirect control over the employment terms of the employees of another entity, it will have duties under the federal wage payment laws. This statement as to how the Department would approach joint employment had particular impact for temporary staffing relationships but also more broadly wherever related entities share almost any common management.

Again, these Guidance documents did not change the law—the DOL does not have that power—but they indicated that when conducting audits, pursuing enforcement actions, referring problems to other federal agencies, or making policy arguments in court, the DOL would more often than not conclude employment exists.

The Limits of the DOL's Present Action

As a basic matter, the current Administration has used the first few months of 2017 to send a message that its agencies' policies will be different. In that regard, Guidance documents are easy to rescind. No actual regulatory action is required because the interpretative guidance never had the force of a regulation in the first place—it was one Administration's statement of how it would approach contentious legal issues. The Trump Administration has not declared what, if any, particular guidelines it will follow to evaluate would-be employment relationships. For now, creating distance from the prior Administration seems to be the goal.

It is important to remember that the laws surrounding independent contractor and joint employer status are primarily determined by federal courts, not by the DOL. Those courts issue rulings as they handle specific facts in litigation over such matters as wage payment, liability for discrimination, and tax-related obligations. State courts occasionally face these same issues, sometimes in connection with claims that a business should have provided workers' compensation insurance for an individual who was treated as an independent contractor or as someone else's employee. No court, state or federal, is bound by any formal Guidance document of the DOL. Judicial decisions across the country vary and even change over time.

For example, the federal Court of Appeals overseeing Maryland, Virginia, West Virginia, and the Carolinas has traditionally been very conservative. Recently, however, it announced a joint employer test that said, in essence, if two entities are "not completely disassociated" on HR functions they will be treated legally as joint employers. While no one knows what "not completely disassociated" fully means in practice, it signals that federal trial courts in those states will ask not which entity has the primary duties to workers but whether two or even more entities share in those duties at all. This test is as broad as any across the country.

Still, the change of interpretation at the DOL is meaningful. The agency is signaling it will approach wage and hour audits differently by leaving more workers alone as independent contractors. It is saying that it will not as aggressively push litigation seeking to force a clearly secondary entity to take on the duty of complying with employment laws. It is advertising that it will push fewer cases before judges.

Be Careful

Employers create risks when they read about a policy shift and assume it will control a particular outcome on any specific set of facts. Instead, seek legal advice before drawing conclusions about your own workplace because the details always matter.