Presidential administration transitions almost always result in policy and enforcement initiative changes at the U.S. Department of Labor (DOL). This year appears to be no different, but it is not yet clear how some recent DOL changes will impact employers and the law. We discuss below two recent DOL moves that have the potential to significantly impact how employers compensate employees for overtime, use independent contractors and evaluate risks and opportunities associated with joint employment arrangements.
(1) Trump DOL Withdraws Appeal After Texas Federal District Court Invalidates Obama Overtime Rule
As we have noted in prior publications, the Obama DOL issued a revised overtime rule that would have dramatically increased the salary threshold under the Fair Labor Standards Act (FLSA) for the “white collar” exemptions (i.e., executive, administrative and professional) from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). The heightened salary requirement was a direct result of President Obama’s directive to the DOL to take aggressive steps to ensure that more employees received higher pay. As a result of the new rule, four million additional employees were expected to receive overtime.
However, in the days leading up to the December 1, 2016 effective date, a federal court in the Eastern District of Texas preliminarily enjoined enforcement of the new rule in Nevada, et al. v. U.S. DOL, et al., No. 4:16-CV-00731. The court held that the new regulations placed too much emphasis on the salary requirement and would have resulted in the reclassification of substantial groups of employees who otherwise performed the requisite exempt executive, administrative and professional duties.
Although then-Secretary of Labor Thomas Perez quickly appealed the decision to the U.S. Court of Appeals for the Fifth Circuit, significant questions remained about whether the Trump administration would prosecute or withdraw the appeal, or possibly change course. Labor Secretary Alexander Acosta fueled speculation about the DOL changing tack during his Senate confirmation hearings by agreeing with the Obama DOL that the salary rule was ripe for an update but suggesting that the new salary threshold went too far. Labor Secretary Acosta posited that one potential alternative to the $47,476 salary threshold was to tie the salary increase to cost of living adjustments, which he suggested could result in a salary threshold of approximately $33,000.
Consistent with Acosta’s remarks, in late June 2017, in briefs filed with the Appellate Court, the Trump DOL withdrew its defense of the increased salary threshold. In its brief, the Department of Justice (DOJ) explained: “[T]he department has decided not to advocate for the specific salary level ($913 per week) set in the final rule at this time and intends to undertake further rulemaking to determine what the salary level should be.” Notwithstanding its request that the Court not opine on the legality of the new salary threshold, the DOJ did ask that the court affirm the DOL’s authority to establish a salary level under the Fair Labor Standards Act.
On August 31, 2017, a month before oral argument in the appellate case, the Texas federal district court confirmed its earlier ruling and granted summary judgment to the twenty-one states and business associations that had challenged the rule. The court again held that the significantly heightened salary test had in essence eliminated the other white collar exemption requirements that employees engage in certain types of duties and/or have certain levels of responsibilities. Significantly, the court did not decide whether the DOL has the authority to set a salary threshold in the first place.
As a result of the district court’s order, on September 5, 2017, the Trump DOL filed a motion to withdraw its appeal, suggesting that the appeal was mooted and that the agency was comfortable with the district court’s ruling. Assuming the Fifth Circuit grants the DOL’s (unopposed) motion, which is probable, the Obama overtime rule will be permanently invalidated, giving the Trump DOL an opportunity to issue its own rule. Indeed, further suggesting that the DOL will issue a new salary threshold rule.
The DOL had issued a public request for comment in June seeking feedback on questions such as:
- Would updating the 2004 salary level for inflation be an appropriate basis for setting the standard salary level and, if so, what measure of inflation should be used?
- Should the regulations contain multiple standard salary levels?
- Would a test for exemption that relies solely on the duties performed by the employee without regard to the amount of salary be preferable to the current standard test?
Responses may be submitted on or before September 25, 2017. See https://www.gpo.gov/fdsys/pkg/FR-2017-07-26/pdf/2017-15666.pdf.
While we wait for the DOL to set its course, employers must continue to ensure that employees are properly classified for overtime purposes under the current federal regulations and state law. Employers in California and New York should know that their states have already instituted higher salary thresholds.
(2) Trump DOL Withdraws Independent Contractor Classification and Joint Employer Guidance
In another move by the Trump DOL, which drew far less media coverage but was nevertheless significant, the agency withdrew two controversial Obama era “Administrator’s Interpretations” relating to misclassification of independent contractors and the definition of joint employment. Both informal interpretations were penned by the then-head of the DOL Wage and Hour Division, David Weil, and sought to significantly broaden the scope of the employment relationship.
In the 2015 independent contractor interpretation (Administrator’s Interpretation No. 2015-1), Weil had postulated, consistent with the Obama DOL’s initiative to expand coverage of the Fair Labor Standards Act to purportedly misclassified independent contractors, that “most workers are employees under the FLSA’s broad definitions.” Toward this goal, the interpretation sought to narrow the circumstances under which an individual could qualify as an independent contractor. In the DOL’s view, only those individuals who are truly in business for themselves and have the managerial authority and skill to affect their profit or loss may be considered independent contractors. We described the Obama DOL’s interpretation in detail in our July 2015 bulletin.
In its 2016 joint employment guidance (Administrator’s Interpretation No. 2016-2), the Obama DOL sought to expand the circumstances under which multiple employers would be considered joint employers and thus potentially held liable for violations of the Fair Labor Standards Act, including minimum wage and overtime violations. While the interpretation applied to all industries, it made specific reference to industries where usage of subcontractors is common such as in agricultural, construction, hospitality, janitorial, logistics/warehousing and staffing.
Weil concluded that the DOL’s joint employment guidance was necessary due to the modern workplace’s increasingly complex employment arrangements and corresponding room for labor violations. Weil commented that “[p]rotecting workers in fissured workplaces—where there is increasingly the possibility that more than one employer is benefiting from their work—has been a major focus for the Wage and Hour Division in recent years.” Many commentators interpreted Weil’s comments and the DOL’s broadened definition of a joint employer as a means to collect moneys from larger and better financed entities in joint employment relationships, e.g., corporate entities contracting with staffing agencies to provide workers.
Notably, while the withdrawal of the Administrator’s Interpretations is a positive development for employers, the Trump DOL made clear that its removal of the two interpretive documents from its website “does not change employers’ legal responsibilities” under the FLSA and the Migrant and Seasonal Agricultural Worker Protection Act. As such, employers should continue to be mindful of potential liability relating to the misclassification of independent contractors and joint employment. To be sure, the Trump DOL has an obligation to pursue claims of independent misclassification and other abuses of the FLSA. Moreover, state departments of labor have become increasingly aggressive in pursuing wage and hour violations.