United States: DOL Withdraws Independent Contractor And Joint Employment Guidance

On June 7, 2017, Labor Secretary Alexander Acosta announced that the U.S. Department of Labor (DOL) has withdrawn two informal guidance documents on independent contractor misclassification and joint employment, both issued during the Obama administration. 

The DOL issued guidance in 2015 that outlined an "economic realities" test seeking to limit misclassification of employees as independent contractors. In 2016, the DOL issued additional guidance explaining its expansive interpretation of joint employment under the Fair Labor Standards Act (FLSA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA)—again outlining a test to determine whether two or more entities could be considered joint employers for purposes of those statutes.

What Happens Now?

The withdrawal of these two administrative interpretations is viewed as a win for business groups, who argued the guidance—which brought more employees under the FLSA's protection—would increase litigation over misclassification and joint employment issues. However, in its news release the DOL's Wage and Hour Division stated that its withdrawal of these two administrator documents "does not change the legal responsibilities of employers" under federal wage and hour laws and that it will "continue to fully and fairly enforce all laws within its jurisdiction," including the FLSA and MSPA. 

In the absence of these guidance documents and the various test factors delineated by the DOL, courts likely will revert to pre-guidance interpretations of independent contractor classification and joint employment as determined by courts in each jurisdiction. 

Independent Contractor Misclassification

In the misclassification analysis context, courts apply a traditional economic realities test to determine whether an individual is an employee under the FLSA. While no single factor is determinative and the entirety of the relationship must be examined, most, but not all courts generally consider some combination of the following factors when applying the economic realities test:

  • the degree of control exercised by the alleged employer over the manner in which the work is to be performed;
  • the alleged employee's opportunity for profit or loss and investment in the business;
  • the degree of skill and independent initiative required to perform the work;
  • the permanence or duration of the working relationship;
  • the extent to which the work is an integral part of the business; and
  • the extent of the relative investments of the employer and worker.

Courts have interpreted the economic realities factors vastly differently depending on the facts and jurisdiction, or even within the same jurisdiction. Absent the DOL's guidance, courts will continue to use the traditional FLSA-specific (and in some cases, narrower) economic realities test to perform factor-by-factor examinations and conduct situational and fact-intensive analyses.

Joint Employment

To determine whether entities are joint employers for purposes of the FLSA, the various federal judicial circuits use different tests. The following chart outlines which tests and factors are generally used in the various circuits. Despite the differences in these tests, courts have emphasized, with near-unanimity, that the inquiry is a flexible one, that all factors need not be satisfied in a given case, and that the central question is the economic realities of the situation at issue. Therefore, these factors should be used as reference points only and not applied mechanically.

Federal Circuit

FLSA Joint Employment Test

First Circuit

Economic Realities Test—Bonnette Version:

  1. Power to hire/fire
  2. Supervision and control over employee work schedules or conditions of employment
  3. Rate and method of pay
  4. Maintenance of personnel records

Second Circuit

Multi-Factor Test Related to Economic Realities Test:

Four Bonnette Factors–plus "Functional Control" Analysis:

  1. whether the putative employer's premises and equipment were used for the work;
  2. whether the direct employer had a business that could shift as a unit from one putative joint employer to another;
  3. the extent to which the workers performed a discrete line-job that was integral to the putative employer's process of production;
  4. whether the responsibility under the contracts between the direct and putative employers could pass from one entity to another without material changes;
  5. the degree to which the putative employers or their agents supervised the work; and
  6. whether the workers worked exclusively or predominantly for the putative employer. 

Third Circuit

Enterprise Test—Version of Economic Realities Test:

  1. Authority to hire and fire employees
  2. Authority to promulgate work rules and assignments and to set the employees' conditions of employment, including compensation (rate and method of payment), benefits, and work schedules
  3.                Day-to-day employee supervision, including employee discipline
  4. Actual control of employee records, such as payroll, insurance, or taxes

Fourth Circuit

Economic Realities Test:

  1. the degree of control that the alleged employer has over the manner in which the work is performed;
  2. the worker's opportunities for profit or loss dependent on his or her managerial skill;
  3. the worker's investment in equipment or material or his employment of other workers;
  4. the degree of skill required for the work;
  5. the permanence of the working relationship; and
  6. the degree to which the services rendered are an integral part of the alleged employer's business.

Fifth Circuit

Economic Realities Test—Bonnette Version

Sixth Circuit

The Sixth Circuit does not have controlling case law under the FLSA.

Seventh Circuit

Economic Realities Test—Bonnette Version

While the Bonnette version applies, the Seventh Circuit has explicitly cautioned that many other (unstated) factors may be relevant from case-to-case.

Eighth Circuit

The Eighth Circuit does not have a circuit-level test or a district-level consensus. 

Ninth Circuit

Economic Realities Test—Modified Bonnette Factors:

  1. Power to hire/fire
  2. Supervision and control over employee work schedules or conditions of employment
  3. Rate and method of pay
  4. Maintenance of personnel records

The Ninth Circuit also considers the following factors in cases involving workers employed by intermediary companies:

  1. whether the work was a specialty job on the production line;
  2. whether responsibility under the contracts between a labor contractor and an alleged employer pass from one labor contractor to another without material changes;
  3. whether the premises and equipment of the alleged employer are used for the work;
  4. whether alleged employees had a business organization that could or did shift as a unit from one worksite to another;
  5. whether the work was "piece work" and not work that required initiative, judgment or foresight;
  6. whether the alleged employee had the opportunity for profit or loss depending upon the alleged employee's managerial skill;
  7. whether permanence existed in the working relationship; and
  8. whether the service rendered is an integral part of the alleged employer's business. 

Tenth Circuit

Distinct Five-Factor Test Related to Economic Realities Test:

  1. the right to terminate the employment relationship;
  2. the ability to promulgate work rules and assignments;
  3. the ability to set conditions of employment, including compensation, benefits, and hours;
  4. the daily supervision of employees, including employee discipline; and
  5. the control of employee records, including payroll, insurance, and taxes. 

Eleventh Circuit

Distinct Eight-Factor Test Related to Economic Realities Test:

  1. the nature and degree of control over the workers;
  2. the degree of supervision, direct or indirect, of the work;
  3. the power to determine the pay rates or the methods of payment of the workers;
  4. the right, directly or indirectly, to hire, fire, or modify the employment conditions of the works;
  5. the preparation of payroll and the payment of wages; 
  6. the ownership of the facilities where work occurred;
  7. the performance of a specialty job integral to the business; and
  8. the relative investments of the purported employer and the contractor. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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