Many companies that operate their businesses on an independent contractor model or supplement their workforce with ICs may be wondering if they will be impacted by the U.S. Department of Labor’s final rule on joint employer status, which was informally released today. They are likely asking, “Does this final rule have any bearing on independent contractors?” The answer is yes.
The Labor Department’s final joint employer rule issued earlier today does not set forth a new test for independent contractor status under the Fair Labor Standards Act. Nevertheless, 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 final 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 relate to the worker’s economic dependence on the purported employer. The final regulation makes it abundantly clear that the test for IC status is different than the test for joint employer status. In particular, the final rule clarifies that economic dependence, while relevant to a determination as to whether a worker is an employee or IC, has no relevance as to whether two or more employers are the worker’s joint employer. In one of the key pronouncements of the final rule, the Labor Department states: “Whether the employer is economically dependent on the potential joint employer is not relevant for determining the potential joint employer’s liability under the [FLSA].”
The proposed rule had identified three example of factors related to economic dependence that some courts had used in determining joint employer status. The new rule makes is clear that while those factors may be relevant to determining IC status, they are wholly irrelevant in determining joint employer status. The final rule identified a fourth factor that may be pertinent to IC status but should not be used in determining joint employer status. Those four factors are:
(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;
(3) where the worker invests in the equipment or materials required to perform the work or the employment of helpers; and
(4) the number of contractual relationships, other than with the potential joint employer, that the potential joint employer has entered into to receive similar services.
Whereas IC status generally focuses on the actions of the worker, joint employer status under the final rule focuses on the actions of the potential joint employer.
New Test for Joint Employer Status
For joint employer determinations, the final new rule establishes a four-factor balancing test. The rule focuses on whether the potential joint employer exercises or controls one or more of the following four “control factors” –
- hires or fires the workers found to be employees;
- supervises and controls their work schedules or conditions of employment to a substantial degree;
- 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 final joint employer test depends on the actual exercise of at least one of the above ”control factors.” This is one of the underlying principles of the final rule – and is a meaningful change.
Many federal courts had determined a company’s joint employer status under the FLSA based on the rights it reserved – even if it never exercised such rights.
If the courts give deference to this final regulation, no longer will they give the same weight to unexercised rights under a contract. This will result in fewer findings of joint employer status under the FLSA.
As the final rule states: “The potential joint employer’s ability, power, or reserved right to act in relation to the employee may be relevant for determining joint employer status, but such ability, power, or right alone does not demonstrate joint employer status without some actual exercise of control.”
Under the standard articulated today by the U.S. Department of Labor, joint employer status is a far less likely result for companies that utilize the services of workers under a contractual relationship with a third party.
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 final rule on joint employer liability would not be applicable.
The final 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 final rule 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 more likely to avoid joint employer liability, as the process includes re-documenting contracts with any other company that engages ICs directly.
Written by Richard Reibstein