Earlier this month, the U.S. DOL (Department Of Labor) announced that it was revoking the standards set for by the Obama Administration for when a company is considered to be a “joint employer” of contract and franchise workers. The prior administration’s regulations were designed to protect against employers’ misclassification of employees as independent contractors.
The particular guidance letters that were removed included the 2015 “administrator’s interpretation” regarding the classification of independent contractors and 2016 “administrator’s interpretation” relating to joint employment. The 2015 “administrator’s interpretation” regarding the classification of independent contractors stated that “ most workers are employees” under the Fair Labor Standards Act (FLSA). The 2016 joint employment “administrators interpretation” presented guidance on joint employment under the FLSA and included a distinction between “horizontal” and “vertical” joint employment. The two letters, which were implemented by the Wage and Hour Division (WHD) administrator, were met with much controversy as the purpose of the letters was to decrease the number of instances in which a worker was misclassified and increase the number of situations in which a business may be considered a joint employer of a worker.
The 2015 “administrator’s interpretation,” titled “Administrator Interpretation 2015-1” construed the definition of an “independent contractor” in a more narrow context than previously used. This particular letter provided that the DOL would shift its focus from whether the business “controls” the operations of the individual’s work to the “economic realities” of the individual’s job situation and whether the individual is financially dependent on the employer. This shift in focus was a substantial change from the “controls test” which resulted in more workers falling under the “employee” classification than “independent contractor” classification. The significance of this result, i.e., of more workers being classified as employees, was that these workers became eligible for overtime compensation and other benefits that come with being considered an employee rather than an independent contractor.
The 2016 “administrative interpretation,” titled “Administrative Interpretation 2016-1” issued guidelines on how the WHD would deal with the question of which employer has obligations owed to the specific worker. With the implementation of this particular letter, the WHD was to evaluate working relationships through a “vertical” analysis of the employment relationship. Vertical joint employment is when a worker has an employment relationship with one worker such as a subcontractor, labor provider, staffing agency or other employer and the “economic realities” show that the person is financially dependent on another employer who is involved in the work. This form of vertical joint employment analysis lead to a substantial increase in the chances of an employer being liable to workers that they secured through a third party. This analysis was designed to decrease employee misclassification as an independent contractor, particularly where there is joint employer relationship.
On June 7, 2017, the U.S. Secretary of Labor Alexander Acosta announced that these “administrator interpretation” letters regarding independent contractors and joint employment would be nullified. Acosta also stated in his announcement that “removal of administrative 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 removal of these liability expanding guidance letters were met with high praise across the labor community including the National Association of Home Builders (NAHB). Chair of the NAHB and Texas-based builder Granger McDonald expressed his satisfaction with the removal stating “given that independent contractors and subtractors are critical to housing, we were very concerned about recent efforts attempting to limit their participation in the home building process. Withdrawing these documents will provide more certainty and clarity for home building firms and other small businesses who work closely with subcontractors and independent contractors.”
The rollback of these guidance pieces should be encouraging to employers directly involved in work with independent contractors, leasing agencies, temp workers, and other potentially joint employment relationships. Additionally, the fact that Secretary Acosta wasted little time reversing these guidance pieces indicates that the reversal of other Obama-era enforcement strategies may be on the horizon. On the other hand, transient workers such as employees who gain employment by virtue of employment will see their protection from being misclassified as an independent contractor be vitiated by this change.
Although the nonprofit worker advocacy group expressed its disappointment with the removal of these guidance letters, the removal has not done anything to alter the legal landscape regarding joint employment and independent contractor conflicts. In New York, the US Court of Appeals for the second circuit has ruled that joint employment should be evaluated on a case-by-case basis based on the totality of the circumstances. The Second Circuit has adopted two different tests for determining joint employer status, which depends on whether the court is looking at the employer’s formal or functional control over the employee.
When determining the issue of whether the secondary employer exercises sufficient functional control over the relevant employees to be considered a joint employer, the Second Circuit applies a six part test which looks at: whether the employee at issue used the secondary employer’s premises and equipment, whether the primary employer had a business that may or did shift as a unit from one secondary employer to another, the extent to which the employees performed a job that was integral to the secondary employer’s production process, whether one subcontractor may pass responsibility under the contracts to another subcontractor without material changes, the degree to which the secondary employer or its agents supervised the employee’s work, and whether the employees worked exclusively or predominantly for the secondary employer. There are also other factors that may be considered when addressing this issue of functional control as long as those factors are pertinent to the court’s assessment of economic realities. The issue of joint employment is a mixed question of both law and fact that is properly decided by a jury.
Another approach that may be used by courts in the Second Circuit is focusing the analysis on whether the secondary employer exercised sufficient formal control over the employees at issue. When using this type of analysis, courts in the Second Circuit apply a four-factor test that focuses on whether the secondary employer had the power to hire and fire the employees, supervise and control employee work schedules or conditions of employment, determine the rate and method of employment, and maintain employment records.
Despite the removal of these particular guidance letters, these second circuit tests regarding joint employment issues that govern the Fair Labor Standards Act and New York Labor Law remain in tact and unaffected by the recent removal of these guidance letters.
Contributed by Richard (R.J.) Cherpak
If you have questions regarding misclassification and/or New York Labor Law, call Gilbert Law Group today at (631) 630-0100.