U.S. Department of Labor withdraws guidance on independent contractors, joint employment - Client Bulletin

As we reported briefly yesterday, the U.S. Department of Labor has withdrawn guidance issued during the Obama Administration related to independent contractors and joint employment.

Both documents were in the form of so-called “Administrator’s Interpretations,” which was a form of guidance the Obama DOL adopted in 2010 when it ended the longstanding practice of issuing Opinion Letters.

The independent contractor guidance, issued July 15, 2015, by then-Wage and Hour Administrator David Weil, took an expansive view of the “employment” relationship, finding that a worker would be an employee and not an independent contractor if “the worker is economically dependent on the employer.” To be an independent contractor, the worker had to be “in business for him or herself (i.e., economically independent from the employer).”

Among other things, the DOL guidance said that for “independent contractor status,” the worker generally (1) could not perform work integral to the company’s business; (2) must have the opportunity to make more or less money based on his or her “managerial” (or “entrepreneurial”) skills; (3) must make a significant investment in equipment or other means of performing the work, in relation to the investment made by the company; (4) must exercise business skills, judgment, or initiative (as opposed to technical skills or expertise); (5) must have a finite relationship with the company, as opposed to a “permanent” or  “indefinite” one; and (6) must not be controlled by the company with respect to the manner in which the work is performed. Not surprisingly, the DOL said that in most cases workers should be found to be “employees” and not “independent contractors.”

Properly classifying a worker is critically important. If an employee is misclassified as an “independent contractor,” the employer can be liable for back wages, including overtime and liquidated damages, under the Fair Labor Standards Act; back taxes and penalties for failure to withhold income, Social Security, and Medicare taxes or pay the employer’s share of Social Security and Medicare taxes; as well as other benefits that are offered to employees, such as stock options, profit-sharing, retirement, health and life insurance, and even severance if the relationship ends.

The joint employment guidance was issued on January 20, 2016, and applied to “joint employer” relationships under the FLSA and the Migrant and Seasonal Agricultural Worker Protection Act. As with the independent contractor guidance, the Obama Administration took an expansive view, finding that there could be a “horizontal” joint employer relationship (workers who perform work for two related companies, for example, or for two unrelated companies that have an employee-sharing arrangement), as well as a “vertical” joint employer relationship (for example, when a staffing company supplies workers to a client, or workers are employed by a subcontractor who performs work for a general contractor).

If a horizontal joint employer relationship exists, then the employee’s work hours for both employers must be aggregated, meaning that the employee is more likely to be entitled to overtime. (And both employers would be jointly and severally liable for failure to pay overtime.) Similarly, in a vertical joint employer relationship, both employers would be liable for any violations of the FLSA (or the MSWPA).

The Trump DOL news release

The announcement by the Trump DOL that these two guidance documents were withdrawn was relatively terse. Here is the full text of the announcement, which was posted yesterday on the DOL website:

U.S. Secretary of Labor Alexander Acosta today announced the withdrawal of the U.S. Department of Labor’s 2015 and 2016 informal guidance on joint employment and independent contractors. Removal of the administrator interpretations does not change the legal responsibilities of employers under the Fair Labor Standards Act and the Migrant and Seasonal Agricultural Worker Protection Act, as reflected in the department’s long-standing regulations and case law. The department will continue to fully and fairly enforce all laws within its jurisdiction, including the Fair Labor Standards Act and the Migrant and Seasonal Agricultural Worker Protection Act.

What now?

Although the Obama-era guidance was expansive, it was not inconsistent with positions taken by some courts ruling on these issues. Thus, employers should continue to be very careful about classifying workers as “independent contractors” or taking untenable positions in “joint employer” situations.

Moreover, the Trump DOL merely withdrew the Obama-era guidance but has not issued “replacement” guidance. Presumably, new guidance will be forthcoming and will be more employer-friendly, but we would not anticipate dramatic changes to existing law.

Indeed, the withdrawal of the two guidance documents could mean nothing more than that the Trump DOL may return to the use of Opinion Letters instead of Administrator’s Interpretations. Opinion Letters are generally issued in response to specific inquiries by employers or their representatives, or by unions. Although they are publicly available (and can be used in litigation), they are fact-specific and usually limited to the questions asked by the employer. As noted, the Obama DOL ended the practice of issuing Opinion Letters responsive to inquiries and instead used Administrator’s Interpretations. In so doing, the DOL chose the subjects on which it wished to opine. Ironically, the Obama DOL issued only seven such Administrator’s Interpretations over the years, two of which have now been withdrawn.

The withdrawal of these two Administrator’s Interpretations is encouraging, and possibly a sign of good things to come when President Trump is able to fully staff other positions, including the two vacancies on the National Labor Relations Board, which under President Obama has also taken a very expansive view of the “joint employer” relationship. In 2015, the Board overruled longstanding precedent and found that an entity can be a “joint employer” if it has the authority to control terms and conditions of employment, even if it does not actually exercise that authority. As our law partner Zan Blue has observed, “The government agencies under President Obama changed the legal analysis of the employment relationship in one very simple and outcome-determinative way—instead of looking at what actually happens, they looked at what could happen. In determining whether a joint employer relationship existed under the National Labor Relations Act, the NLRB switched to a ‘potential control’ test from the ‘actual control’ test. Administrator Weil did the same thing.”

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