DOL May Rescind Final Rules on Independent Contractor, Joint Employer Status
- The U.S. Department of Labor (DOL) recently announced plans to rescind two final rules that were published under the Trump Administration, which could have significant implications for employers required to comply with the Fair Labor Standards Act (FLSA).
- The DOL may withdraw its independent contractor final rule, which adopts the "economic reality" test for determining whether an individual is an employee or independent contractor under the FLSA, before it becomes effective in May 2021.
- The DOL also may withdraw its joint employer final rule, which adopts a relatively narrow definition of a "joint employer" under the FLSA, shortly after it became effective in May 2020 but was partially struck down by a federal court in September 2020.
- The DOL's proposed withdrawal of these final rules are open for public comment until April 12, 2021.
The U.S. Department of Labor (DOL) proposed on March 11, 2021, withdrawing the independent contractor and joint employer final rules under the Fair Labor Standards Act (FLSA). The independent contractor final rule provides guidance on determining whether an individual is an employee (and potentially covered under the FLSA) or an independent contractor (and not covered under the FLSA). The joint employer final rule provides guidance on determining joint employer status when an employee performs work for their employer that simultaneously benefits another individual or entity.
Independent Contractor Final Rule
The FLSA's minimum wage and overtime pay requirements apply only to employees, not independent contractors. On Jan. 7, 2021, the DOL published its final rule on distinguishing between employees and independent contractors under the FLSA. The DOL's final rule adopts the "economic reality" test, which provides that an individual is an independent contractor "if the individual is, as a matter of economic reality, in business for him or herself." The economic reality test focuses on five nonexclusive factors:
- the nature and degree of the worker's control over the work
- the worker's opportunity for profit or loss
- the amount of skill required
- the exclusivity and length of the relationship between the worker and the potential employer
- the extent to which services rendered are an integral part of the business
The first two factors – the worker's control over the work and opportunity for profit or loss – are considered primary factors and given greater weight. The other three factors serve more as additional guidance for evaluating an individual's status if the first two factors are inconclusive.
The independent contractor final rule has not yet taken effect, but it is currently scheduled to go into effect on May 7, 2021. Now, however, the DOL is proposing to withdraw this final rule because the DOL "questions whether the Rule is fully aligned with the FLSA's text and purpose or case law describing and applying the economic realities test." Specifically, according to the DOL, the final rule's "standard has never been used by any court or by [the DOL's Wage and Hour Division], and is not supported by the [FLSA's] text or case law." Further, the DOL believes the final rule failed to fully consider "the likely costs, transfers, and benefits that could result" from the rule's adoption – including the cost of individuals being excluded from FLSA protection.
Joint Employer Final Rule
A person or entity is liable for paying minimum wage and overtime only if they are an "employer" under the FLSA. An employee can have two or more employers who are jointly and severally liable for the wages due the employee – i.e., "joint employers." On Jan. 12, 2020, the DOL published its final rule on defining a "joint employer" under the FLSA, which became effective on March 16, 2020. The focus of the final rule's test is whether the purported joint employer exercises substantial control over the terms and conditions of the employee's work. To make this determination, the final rule adopts a four-factor balancing test that considers whether the potential joint employer:
- hires or fires the employee
- supervises and controls the employee's work schedule or conditions of employment to a substantial degree
- the employee's rate and method of payment
- maintains the employee's employment records
Under the final rule, no single factor is dispositive in determining joint employer status, and additional factors may be considered "if they are indicia of whether the potential joint employer exercises significant control over the terms and conditions of the employee's work."
According to the DOL, the purpose of the final rule was "to promote certainty for employers and employees, reduce litigation, promote greater uniformity among court decisions, and encourage innovation in the economy." Shortly after its promulgation, however, 17 states and the District of Columbia filed a federal lawsuit in New York to have the final rule vacated for allegedly violating the Administrative Procedure Act. In September 2020, the New York federal court vacated most of the final rule. As a result, the DOL is now proposing to withdraw this final rule. In addition to the federal court's decision to vacate the final rule, the DOL outlined other reasons for its proposal to withdraw the rule – including that the rule "may not have adequately considered the costs for employees."
Before the original rules were announced, the federal circuit and district courts had already developed, over the course of decades, a significant body of case law related to both the independent contractor and joint employer inquiries under the FLSA. As a result, the specific tests used, and the application of facts to those tests, can vary in meaningful ways from circuit to circuit and depending on the specific industry and factual context presented (e.g., is a franchise relationship involved in a potential joint employer case?). This has led to a relative lack of predictability in terms of how courts will resolve particular cases.
Whether the Trump-era regulations are maintained or replaced with Biden-era versions, it appears that issues that were once the subject of heated litigation in FLSA overtime actions may be put to rest through administrative rule-making.
The DOL's proposed withdrawal of the final rules on independent contractor and joint employer status are open for public comment until April 12, 2021. After the comment period closes, the DOL will either withdraw the current final rules or issue new final rules with updated standards. For now, the joint employer final rule remains in effect until it is formally rescinded by the DOL. On the other hand, the independent contractor final rule has not yet taken effect, so covered employers should continue operating under the standards that existed before the final rule was issued.
If you have any questions regarding the DOL's proposed withdrawal of these final rules or Holland & Knight's FLSA practice, please contact the authors or another member of the firm's Labor, Employment and Benefits Team.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.