On June 7, 2017, the U.S. Secretary of Labor Alexander Acosta announced the withdrawal of the U.S. Department of Labor’s (“DOL”) guidance on independent contractors and joint employment issued during the Obama administration, without issuing replacement guidance. Although the DOL offered no explanation for its decision, the move signaled that, under the Trump administration, the DOL may take a more employer-friendly approach when investigating these issues. At the moment this is simply an expectation and will not serve as a defense before the DOL or in litigation. So how do employers protect themselves? Unfortunately, there is no foolproof answer. The best defense is knowledge. Employers should understand the DOL’s position in the withdrawn guidance, the DOL’s position pre-guidance (likely the DOL’s current position) and how the absence of the guidance may impact judicial decisions.
In July 2015, employers began scrambling to ensure they were properly classifying workers when the DOL issued guidance, declaring that “most workers are employees under the FLSA [Fair Labor Standards Act],” rather than independent contractors. In line with this position, the DOL set forth a multi-factor “economic realities” test with a focus on whether a worker was economically dependent on the employer or was in business for himself or herself. The DOL issued additional guidance in January 2016 explaining its broad interpretation of joint employment. According to the DOL, joint employer liability did not require “direct control.” The DOL explained that “indirect control” was sufficient because “[t]he concept of joint employment, like employment generally, should be defined expansively under the FLSA.”
While these guidance letters were not binding, they provided a strong indication of how the DOL would interpret the FLSA in enforcement actions. Furthermore, courts often rely on the DOL’s interpretation to resolve these issues, especially since the FLSA does not set forth welldefined tests for determining when employers can classify a worker as an independent contractor versus an employee or when a joint employment relationship exists.
Absent replacement guidance, the DOL and courts are expected to revert to the preguidance tests. The independent contractor test will no longer start with the presumption that all workers are employees. Pre-guidance, the “economic realities” test for determining whether a worker is an employee or independent contractor focused on a business’s control over the worker, rather than the worker’s economical dependence on the business. Generally, this pre-guidance test includes some combination of the following factors:
- The degree of the employer’s right to control the manner in which work is performed;
- The degree of skill required to perform the work;
- The worker’s opportunity for profit or loss;
- The duration of the working relationship;
- The worker’s opportunity for profit or loss; and
- The extent to which the work is an integral part of the business.
Some courts choose to add factors to the test and/or put greater weight on certain factors, while other courts apply a different test all together. Employers should start by analyzing these basic factors. If an employer believes a worker is an independent contractor based on these basic factors, then it should dig further by looking at the factors considered by federal judicial circuits where it has business operations. The varying tests leave employers with the difficult task of monitoring court decisions in all jurisdictions where they operate, especially in the absence of replacement guidance from the DOL.
As for joint employer liability, it is expected that the DOL will return to requiring “direct control” (i.e. hiring and firing, scheduling, and determining compensation) over the worker. In determining whether entities are joint employers for purposes of the FLSA, the various federal judicial circuits use different tests. Many circuits consider the following four factors to some degree in determining whether an entity is a joint employer: power to hire/fire, supervision and control over work schedules or conditions of employment, rate and method of pay, and maintenance of personnel records. Despite the varying tests, courts agree that the inquiry is a flexible one and each factor does not need to be met.
Although guidance from the DOL would allow employers to focus on a single test rather than trying to balance the various tests used by federal judicial circuits, the DOL under the Trump administration is unlikely to issue new guidance letters. Instead, the DOL is expected to issue opinion letters now (as of June 27, 2017) that it has reinstated this long-standing practice. Unlike an informal guidance letter, “[a] n opinion letter is an official, written opinion by the Wage and Hour Division of how a particular law applies in specific circumstances presented by an employer, employee or other entity requesting the opinion.” (DOL News Release, US Department of Labor Reinstates Wage and Hour Opinion Letters (6/27/27), https://www.dol. gov/newsroom/releases/whd/whd20170627.) Importantly, employers may rely on an opinion letter to establish a good-faith defense in wage and hour litigation.
The withdrawal of the employee-friendly guidance letters does not necessarily mean the law now favors employers. As if this was not complicated enough, a worker may be an independent contractor under the relevant federal circuit court’s test, and an employee under state law because the FLSA is not always consistent with state legislation. So employers must ask how the DOL, federal courts and state courts would perceive the worker and/or entity’s role in the worker’s employment. With no bright line rules in place, and without guidance from the DOL, employers must keep their guard up.
The legal information provided in this article is general in nature and should not be construed as advice applicable to any particular individual, entity or situation. Except as otherwise noted, the views expressed in this article are those of the author(s).
Sweta Patel is a Partner at Klein, Hockel, Iezza, & Patel, PC, who focuses her practice on labor and employment and pharmacy law. Sweta also represents businesses in a variety of general commercial litigation matters, including lease disputes and breach of contract claims. For more info on Sweta and her practice, Click Here.