As we have already noted on this subject Blog, a central goal of the Trump administration was to target and overturn the Obama-era labor rules. The Trump Department of Labor (DOL) took what was seen as a consistently pro-business stance, reversing pro-worker Obama-era rules and issuing new employer-friendly rules. With the proverbial pendulum swinging back to worker protection under the Biden administration, two rules with a significant impact on employers are likely to change: the classifications of independent contractors / employees and the “co-employer” doctrine.
On March 11, 2021, the DOL announced its intention to rescind two final Trump-era rules for classifications of independent contractors / employees and joint employers under the Fair Labor Standards Act (FLSA). The final rules provided much needed clarification on these evolving areas of law, but were criticized as being too favorable to employers.
For your information, the FLSA requires covered employers to pay employees at least the federal minimum wage for each hour worked and overtime premiums for each hour worked in excess of 40 hours. The two currently criticized rules are particularly important because they determine the applicability of the FLSA. Independent contractors do not benefit from the benefits provided by the FLSA. If two companies are found to be joint employers, the companies are jointly responsible for minimum wage and overtime under the FLSA. The status of joint employer is particularly relevant in the context of franchisees, subcontractors and recruitment agencies.
The first notice of regulatory proposal proposes the withdrawal of the independent contractor final rule published on January 7, 2021. This news follows the DOL’s announcement that it will delay the date of entry into force of the rule of sixty days, starting March 8. 2021 to May 7, 2021.
The final rule codifies the “economic realities” test to determine whether a person is an employee or an independent contractor. The rule sets out five factors to consider in making this decision:
- the nature and degree of control of the worker over the work;
- the possibility for the worker to make a profit or a loss;
- the skill level required for the position;
- the permanence of the employment relationship; and
- and to what extent the role of the worker is integrated into the overall functioning of the organization.
The first two factors are the “essential factors” and are the most conclusive in determining whether a person is considered an independent contractor or an employee.
Overall, the final rule seeks to determine whether, in terms of ‘economic reality’, the worker depends on a particular individual, company or organization for their work (and therefore is an employee) or if he is in business for himself (and therefore is an independent contractor). In addition, the actual practice of the worker and the potential employer is more relevant than what may be contractually or theoretically possible.
The rule makes it easier to classify workers as independent contractors, as it no longer focuses on company control over work, but rather on worker control over their work and income based on an initiative. or an individual investment.
The ministry cited several reasons for proposing the withdrawal of the final rule. The agency claimed that the courts and the department had not used the economic reality test adopted by the rule and that the FLSA text or case law did not support the test. The DOL further asserted that the rule “would reduce or minimize other factors traditionally considered by the courts; making the economic test less likely to establish that a worker is an employee under the FLSA.
The second notice of regulatory proposal seeks to repeal a final rule on joint employer relations published on January 13, 2020.
The final rule sets out a four-factor test to determine whether an entity is a joint employer. The court must assess whether the putative co-employer:
- hires or fires the employee;
- supervise and control to a large extent the work schedule or the conditions of employment of the employee;
- determines the rate and method of payment of the employee; and
- maintains employee employment records.
According to the test, no factor is decisive in determining the status of co-employer; however, keeping employment records alone does not indicate joint employer status.
The rule also specifies that a joint employer must in fact exercise control over the employee. Just having the ability to exercise control is not enough.
The rule restricts the definition of a joint employer. The rule states that a “franchisor, employer brand and sourcing or similar business model and certain contractual arrangements or business practices do not make joint employer status under the FLSA more or less likely.” The rule also clarifies that an employee’s “economic dependence” on a putative joint employer does not determine whether it is a joint employer.
Unlike the final rule of the independent contractor, this rule has indeed had the opportunity to see the light of day. However, it was already under attack when it came into effect on March 16, 2020. In February 2020, several states filed a lawsuit against the DOL in the Southern District of New York, claiming the rule violated the Administrative Procedure. Act. Last September, the Southern District overturned the majority of the rule, saying the rule was contrary to the FLSA and “arbitrary and capricious”.
The comment period for the two proposed rules will end on April 12, 2021.
While it is not yet known whether the DOL will replace these rules, employers should prepare for a broader scope of the FLSA as part of the new administration’s DOL. We have previously predicted The Biden administration is likely to speed up enforcement of misclassifications of workers and likely support efforts to establish a standard for independent contractors inspired by the employee-friendly ABC test. Employers should review all current worker classifications and independent contractor agreements. The Biden DOL will also likely expand the definition of “co-employer”. Employers should consider all working arrangements that might raise common issues for employers. These areas of law are often complex and employers are encouraged to seek advice from an employment counselor.
As a rule, employers are wary of ides of March, because when the Biden administration strives for employer-friendly rules and regulations, it is often not lacking.