The DOL Plans to Rescind Rules Affecting Independent Contractor and Joint Employer Status—What Does This Mean for Employers?

On March 11, 2021, the Department of Labor (DOL) announced plans to rescind two final rules that had been published under the Trump administration. The Independent Contractor Final Rule, issued by the DOL in the eleventh-hour before President Trump left office, was an employer-friendly rule that used a new “economic reality” test, guided by a five factor analysis, to classify workers as either employees or independent contractors. The Trump administration’s Joint Employer Rule, which was published in January 2020, was also employer-friendly.

Where Do These Rules Stand?

Independent Contractor Final Rule

The DOL’s proposal to withdraw this rule includes the following reasons: that the rule adopted a new “economic reality” test to determine whether a worker is an employee or an independent contractor; that courts and the department have not used the new economic reality test; that neither the FLSA text nor longstanding case law supports the test; and that the rule would narrow or minimize other factors considered by courts traditionally, making the economic test less likely to establish that a worker is an employee under the FLSA.

Even if the Independent Contractor Rule as proposed is ultimately withdrawn, the DOL has not proposed any regulatory guidance to replace it. Still, based on the DOL’s stated reasons for withdrawing the Rule, it is likely that under the new administration the DOL will revert to a more employee-friendly version.

Joint Employer Relationships under the FLSA

A joint employer is an individual or entity separate from an employee’s primary employer who is jointly and severally liable for the employee’s wages. The Joint Employer Rule, which took effect in March 2020, used a four-factor balancing test to determine when an employee performed work for his or her employer that simultaneously benefitted another individual or entity. The Rule ignored the employee’s economic dependence on the potential joint employer and specified that an employer’s franchisor, brand and supply, or similar business model and certain contractual agreements or business practices do not make joint employer status more or less likely.

A District Court in the Southern District of New York vacated the majority of this rule, stating that it was contrary to the FLSA and was “arbitrary and capricious” due to its failure to explain why the department had deviated from all prior guidance or to consider the effect of the rule on workers. Citing concerns that the Joint Employer test might be unduly narrow and has not been widely adopted by courts, the DOL proposed to rescind the rule without replacing it with any additional regulatory guidance.

What Does This Mean for Employers?

Although it is unclear where these rules will go from here, it is likely that guidance from the DOL on these compliance subjects will return to more employee-friendly versions. Thus, it will be easier to classify an individual as an employee rather than an independent contractor and it will be easier to allege that an individual or entity is a joint employer.

Employers should always proceed with caution when classifying workers as independent contractors, particularly a large number of workers. This classification is a fact-intensive analysis with costly implications if the employer gets it wrong. Likewise, because it might be easier for an individual to allege that a person is a joint employer, organizations likely to be in this position, such as staffing agencies and franchisors, should be mindful of their exposure to potential liability. If an organization is considered a joint employer, it will be jointly and severally liable for an employee’s wages. Thus, an employer who finds itself in either of these scenarios or is questioning its potential exposure to risk should seek legal advice at the outset to avoid issues down the road.