Impact of Proposed Joint Employer Rule on Independent Contractor Misclassification Claims

Companies that operate their businesses on an independent contractor model or supplement their workforce with ICs are likely to be asking, “Does the proposed new joint employer regulation issued by the U.S. Department of Labor have any impact on independent contractors?”  The answer is yes.

While the Labor Department’s proposed joint employer rule issued earlier today does not set forth a new test for independent contractor status under the FLSA, it will have an important impact on one aspect of IC law:  whether a business that contracts with another company, which is found to have engaged in IC misclassification, will also be liable under the joint employer doctrine.  Under the new proposed rule, the likelihood of such exposure will be considerably reduced.

Different Tests for IC Status and Joint Employer Status

The test for independent contractor status under the FLSA has been well established by U.S. Supreme Court decisions.  That test is commonly referred to as the “economic realities” test and it focuses on factors that bear on the workers’ economic dependence on the purported employer.  The proposed regulation makes it abundantly clear that that economic dependence has no relevance to joint employer status.  In one of the key pronouncements of the proposed rule, the Labor Department states that “joint employer status under the Act is not determined by the employee’s ‘economic dependence’…

The proposed rule explains that joint employer status focuses on the actions of the potential joint employer—not on the actions of the employee or his or her immediate employer.  The proposed rule then identifies three examples of economic dependence that are relevant to determining IC status but are  irrelevant in determining joint employer status:

(1) where the worker performs a specialty job or a job that otherwise requires special skill, initiative, judgment, or foresight;

(2) where the worker has the opportunity for profit or loss based on his or her managerial skill; and

(3) where the worker invests in the equipment or materials required to perform the work.

As the proposed regulation states:  “While courts have used these factors for determining whether a worker is an employee or independent contractor, they are not relevant for determining whether additional persons are jointly liable under the Act to a worker whose classification as an employee has already been established.”

Rather, as noted above, what are relevant are the actual actions of the potential joint employer.  The proposed new rule establishes a four-factor balancing test focusing on four types of actions:  whether the potential joint employer –

  • hires or fires the workers found to be employees;
  • supervises and controls their work schedules or conditions of employment;
  • determines their rates of pay and methods of payment; and
  • maintains their employment records.

Unlike IC tests that focus on the right to control – which can be established through contractual provisions, even those that are unexercised – the proposed joint employer test focuses on actions the second company actually undertakes in practice, not theoretically what it has a right to do.  This is one of the underlying principles of the proposed new rule – and would be a meaningful change in the law.

Many federal courts have determined joint employer status under the FLSA based not only on what the second company actually did in practice but also the rights it has reserved under contract to impact the first company’s employees – even if it never exercised such rights.

If the courts give weight to this proposed regulation, no longer will they consider unexercised rights under a contract.  This will likely result in fewer findings of joint employer status under the FLSA.

As the proposed rule states: “[A] person’s ability, power, or reserved contractual right to act with respect to the employee’s terms and conditions of employment would not be relevant to that person’s joint employer status under the Act. Only actions taken with respect to the employee’s terms and conditions of employment, rather than the theoretical ability to do so under a contract, are relevant to joint employer status under the Act.”

The proposed regulation also provides examples of conduct that indicates joint employer liability and conduct that does not.  One example refers to a business contract where one company requires the other to institute workplace safety measures, wage floors, sexual harassment policies, morality clauses, or requirements to comply with the law or promote other desired business practices.  According to the proposed rule, such contractual provisions do not make joint employer status more or less likely under the FLSA.

Types of Situations in Which Joint Employer Liability Can Arise in an IC Misclassification Case

As mentioned in many of our monthly blog posts about new and pending cases, it is commonplace for plaintiffs’ class action lawyers to sue multiple parties when filing class and collective actions asserting independent contractor misclassification.

For example, retailers have been sued as joint employers under the FLSA when they contract with delivery companies that in turn retain drivers and installers as ICs to deliver and/or install the retailer’s purchases.  Similarly, companies providing cable or telephone services have been sued as joint employers when they use a third party to engage personnel classified as 1099ers to sell services or install equipment.  Even the federal government has been sued as a joint employer, most recently by a dental hygienist retained as a 1099er by a government contractor that provides dental services at a federal prison.

In contrast, joint employer liability generally should not  be an issue where workers classified as ICs provide services directly to the business that engages them or to customers of the business. In that instance, there is generally no “second company” involved that may be jointly liable together with the company that has retained the workers.  For those businesses, the proposed new rule on joint employer liability would not be applicable.

Takeaways

The proposed joint employer regulation only applies to lawsuits brought under the FLSA; it has no impact on independent contractor misclassification liability under state wage and hour laws.  While this proposed rule, if adopted, will minimize the likelihood of joint employer liability for IC misclassification under the FLSA, companies would be wise to minimize their exposure under that law and state wage laws by enhancing their level of independent contractor compliance.

How can businesses do so? Many have resorted to a process such as IC Diagnostics™, whereby companies are able to restructure, re-document, and re-implement their IC and business relationships in a manner that considerably enhances their compliance with federal and state IC laws.  Those companies that have already undergone a process such as IC Diagnostics are likely to be safe from joint employer liability, as the process includes re-documenting contracts with any other company that engages ICs directly.

The comment period for the proposed new rule is 60 days from April 1, 2019.  There will likely be thousands of comments filed, requiring months of review by the Labor Department.  If the final rule maintains the thrust of the proposed regulation, it will most assuredly simplify joint employer issues under the FLSA, assuming the courts give deference to the new rule and apply it as drafted.

Written by Richard Reibstein

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