This article was originally produced for Law360
The phrase "federal regulation" in today's politics can be toxic. Critics deride its use, and many believe its perceived explosive growth under the Obama administration is evidence that the president is ruling by "regulatory fiat" and ignoring the will of Congress.
Quantitatively speaking, these critiques miss the mark. According to the nonpartisan Congressional Research Service, the 13,000 rules finalized during President Obama's first term were slightly fewer than those published during George W. Bush's first term. And although the Code of Federal Regulations now contains more than 175,000 pages, a 146 percent increase since 1975, the Obama administration has repeatedly touted its efforts to overhaul unnecessary regulation and bring the federal regulatory apparatus into the 21st century. So why all the fuss? The answer lies in the qualitative, rather than quantitative, nature of the regulation.
President Obama's recent activity in the labor and employment context provides the perfect example. It is no secret that the president believes the current legislative framework governing the American workplace is flawed. The very first bill he signed into law was an employment-related statute: the Lilly Ledbetter Fair Pay Act.
Since then, Congress has become paralyzed with gridlock, the nature of the American workforce has changed and the passage of federal labor and employment legislation has all but disappeared. The result has been an increased use of federal regulation and executive orders by the president to fundamentally change the nature of the American workplace.
This article looks at five areas in which this regulatory push has made the biggest splash: the expansion of (1) the definition of employer; (2) entitlements to minimum wage and overtime protections; (3) the definition of employee; (4) gender identity and sexual orientation protections; and (5) pay-related protections, such as paid sick leave and increased compensation data sharing under federal law.
Expanding the Definition of Employer
Most employment-related statutes only apply to employers. Whether a company is an employer under federal law depends on the statute being applied and the test used. The Obama administration is actively expanding the concept of "employer" through a variety of regulatory actions.
The most recent example of this expansion is the National Labor Relations Board's Browning-Ferrisdecision, in which the NLRB reconsidered the concept of joint employer under the National Labor Relations Act. The NLRA was enacted in 1935 and guarantees the rights of employees to organize, form unions and bargain collectively with employers.
In a 3-2 decision, the NLRB overturned 30 years of precedent and returned companies to a pre-1984 joint-employer standard. Joint-employer liability under the NLRA is now no longer limited to companies that “directly and immediately” exercise control over the terms and conditions of another company's employees' employment. It will instead now be imposed where a company retains "the authority to [directly or indirectly] control employees’ terms and conditions of employment" even if such authority is not exercised. The NLRB justified this change, in part, as a necessary alignment of the law with “changing economic circumstances, particularly the recent dramatic growth in contingent employment relationships.”
This decision will undoubtedly influence other joint-employer standards companies face, exposing them to a host of potential new liabilities. The Fair Labor Standards Act, Title VII of the Civil Rights Act, the Americans with Disabilities Act and the Age Discrimination in Employment Act, for example, all have been interpreted as recognizing joint-employer liability. Those standards almost uniformly require the actual exercise of direct control (as opposed to unexercised indirect control) over employees’ day-to-day activities. The U.S. Department of Labor's Wage and Hour Division, which administers the FLSA, and the U.S. Equal Employment Opportunity Commission, which administers Title VII, have signaled a desire to revisit the issue. And, most recently, just days in advance of the NLRB's Browning-Ferrisdecision, a U.S. Occupational Safety and Health Administration draft memorandum leaked out indicating the agency’s interest in pursuing joint-employer cases against franchisors and their franchisees.
Expanding Minimum Wage and Overtime
The Obama administration has also been actively engaged in expanding minimum wage and overtime protections under federal law. The FLSA currently entitles covered nonexempt employees to a minimum wage of not less than $7.25 per hour and overtime pay at a rate not less than one and one-half times the regular rate of pay after 40 hours worked in a workweek. The FLSA also exempts certain bona fideexecutive, administrative and professional employees.
President Obama has publicly called for Congress to raise the minimum wage, but Congress has not acted. A large plurality of states and some cities have raised their minimum wages above the federal minimum either through legislative action or popular initiative. Some of those efforts have been challenged in the courts. The president has also acted via executive order to require many federal contractors to increase the minimum wage for their employees to $10.10 per hour.
The DOL is also working on overhauling the overtime exemptions for executive, administrative and professional employees under the FLSA. In July, the DOL's Wage and Hour Division published a proposed rule: (1) increasing the salary threshold for these exemptions and (2) soliciting comment on adopting a new test for determining whether executive, administrative or professional duties are an employee's "primary duties."
Under existing law, employees can earn as little as $455 per week and still be exempt. Under the proposed rule, the threshold would be set at the 40th percentile of a full-time salary worker, which is $951 ($49,452 for a full-year worker) now, or $970 ($50,440 for a full-year worker) in the first quarter of 2016. If the DOL adopts the California primary duties test, putative exempt employees would also need to spend at least 50 percent of their time exclusively performing exempt tasks. The DOL estimates these changes, if adopted, would increase overtime coverage by 5 million workers.
The DOL has also acted to extend overtime protections under the FLSA to almost 2 million home health care workers. That rule, however, has been challenged in the courts. And although a recent court of appeals decision affirmed the rule's validity, the DOL will not begin enforcing its provisions until the appeals process winds down.
Expanding Who Is Considered an Employee
With the rise of the "sharing economy," approximately 10 percent of the American workforce now self-identifies as independent contractors. Although data shows that companies using independent contractors can save between 20 and 40 percent on labor costs, government sources estimate that in 2014 approximately 60 percent of lost government revenue was due to the misclassification of independent contractors. It is in this context that the Obama administration is actively engaged in expanding the concept of employee under federal law.
As a bit of background, the definition of employee varies from statute to statute often depending upon judicially created tests interpreting vague statutory guidance. The economic realities test applies to employee status under the FLSA, the Migrant Seasonal Protection Act and the Family and Medical Leave Act. This test is broader than the common law control test, which is used primarily to determine employee status under state law.
The economic realities test focuses on whether the worker depends on the company for his or her economic support, whereas the control test primarily looks at whether the company controls the modes of employment, such as the methods of accomplishing work tasks, provision of equipment and work space, pay and discipline.
A third test, the so-called hybrid test, combines the two and has been used by the NLRB when enforcing the NLRA and the U.S. Department of Justice when enforcing Title VII and the ADA.
The DOL's Wage and Hour Division has been particularly active in expanding the definition of employee under its jurisdiction. The Wage and Hour Division's Administrator David Weil recently issued a 15-page administrator’s interpretation in which he stated that the DOL views “[m]ost workers” as “employees” under the FLSA. Although this administrative guidance does not break new ground substantively (e.g., the guidance follows the "economic realities" test), it does cast a large shadow on the independent contractor business model and represents a larger effort by the Obama administration to curb misclassification of every type in the workplace.
The DOL's last three budgets submitted to Congress, for example, all included an additional $10 million to provide states with block grants under its "Misclassification Initiative," which increases state enforcement efforts. And although courts are not required to follow DOL guidance, as the Second Circuit recently demonstrated in a case involving unpaid interns, companies can expect to see a rise in private litigation attempting to use the new Wage and Hour Division guidance as a tool to persuade courts to adopt a more expansive view of employee under federal law.
Expanding Protections for Gender Identity and Sexual Orientation
Another area in which the Obama administration has been particularly active has been its expansion of gender identity and sexual orientation protections under federal law. This has included changes to anti-discrimination statutes and access to medical leave under the FMLA.
The current legislative matrix of anti-discrimination statutes includes, but is not limited to, Titles VI and VII of the Civil Rights Act of 1964, Title IX of the Education Amendments of 1972, the ADEA, the ADA, Section 504 of the Rehabilitation Act of 1973 and Section 1557 of the Affordable Care Act. Each of these statutes prohibit discrimination on the basis of race, color, sex, national origin, religion, age and disability. Title VII is the statute that applies to the hiring and employment of individuals.
With issues of gender identity and sexual orientation dominating the social landscape, and following the landmark U.S. Supreme Court decisions in United States v. Windsor (striking down Section 3 of the Defense of Marriage Act) and Obergefell v. Hodges (striking down state statutes banning same-sex marriage), there has been pressure on Congress to amend Title VII to include "gender identity" and "sexual orientation" as protected categories. As those efforts have stalled in Congress, the Obama administration has acted.
For years federal courts rejected claims by applicants seeking protection against gender identity and/or sexual orientation discrimination under Title VII because the statute does not expressly include the phrases "gender identity" or "sexual orientation." The Supreme Court changed that trajectory in 1989 when it held that "sex" discrimination under Title VII includes discrimination based on sex stereotyping. Since then, the EEOC has held that "sex" discrimination under Title VII also includes gender identity and sexual orientation discrimination. A number of courts have agreed, and the DOL, U.S. Department of Health and Human Services and DOJ have all issued statements reflecting similar opinions. Most recently, the Office of Personnel Management issued guidance regarding the employment of transgender individuals in the federal workplace, and OSHA has issued a publication, "A Guide to Restroom Access for Transgender Workers."
The DOL also issued a set of final rules earlier this year allowing employees to take FMLA leave to care for a same-sex spouse, and revised regulations prohibiting contractors and federally assisted construction contractors and subcontractors from discriminating in employment decisions by adding gender identity and sexual orientation as express categories of protection.
This approach of combining the historically distinct categories of sex, gender identity and sexual orientation is noteworthy. Whether this approach will be adopted by other branches of government remains to be seen. And there will almost certainly be further developments in this area as the curtain falls on the Obama administration.
Expanding Pay Protections
The Obama administration has also focused its attention on pay-related protections under federal law. The very first bill President Obama signed into law was the Lilly Ledbetter Fair Pay Act, which extended the time period in which claimants can bring pay discrimination claims. In April 2014, the president also signed two executive orders, one prohibiting federal contractors from discriminating or retaliating against employees who share information about their compensation, and the other requiring federal contractors to disclose summary data to the DOL on the compensation paid to their employees, including data by sex and race. The DOL is expected to release a final rule on the former within weeks, and a final rule on the latter has not been released.
On Labor Day, the president also signed a new executive order calling on the DOL to issue regulations to provide employees of federal contractors with at least seven days of paid sick leave per year. Those regulations, if adopted, would most likely go into effect in 2017.
Although these examples only provide a snapshot of the Obama administration's overall regulatory strategy, they demonstrate a concerted effort by the president to avoid an intransigent Congress and reshape the American workplace through executive action. This means more regulatory changes in the near future for companies to consider, and with it most likely an increase in liability exposure. In the long-term, whether this regulatory strategy will continue beyond 2016 remains to be seen.