On March 11, 2021, the Department of Labor (DOL) announced two Notices of Proposed Rulemaking (NPRM) to rescind the previous administration’s joint employer and independent contractor rules.
Joint employer rule
The first NPRM proposes rescinding the joint employer rule. Joint employers can be held jointly and severally liable for wage and hour claims under the Fair Labor Standards Act (FLSA). The Trump-era joint employer rule significantly modified the DOL’s interpretation of joint employer status by adopting a four-factor test to analyze whether a joint employer relationship existed. The new test shielded businesses that use staffing companies to hire workers from liability as joint employers for many claims under the FLSA.
As we previously reported, the joint employer rule was issued in January 2020 and took effect in March 2020. However, the rule was challenged in federal court soon after it went into effect. On Sept. 8, 2020, the U.S. District Court for the Southern District of New York vacated part of the joint employer rule, holding that the rule is contrary to the FLSA and arbitrary and capricious. Now, the DOL has proposed rescinding the joint employer rule completely.
Independent contractor rule
The DOL has also proposed rescinding its independent contractor rule issued on Jan.7, 2021. Unlike the joint employer rule, the independent contractor rule never went into effect. The rule was originally scheduled to take effect March 8, 2021, but the DOL delayed the rule’s effective date to May 7, 2021, under a regulatory freeze issued by the Biden administration.
By way of background, independent contractors are not covered by the FLSA. The FLSA has long utilized an economic reality test to determine whether an individual is an independent contractor or a FLSA-covered employee. The independent contractor rule would have modified the economic reality test by identifying two “core” factors to be used to make a determination of whether a worker is an independent contractor or employee:
- The nature and degree of the worker’s control over the work and
- The worker’s opportunity for profit or loss based on the worker’s initiative and/or investment.
The rule also identified three additional factors to be considered, which may be probative where the two core factors do not point to the same classification. Those factors are:
- The amount of skill required;
- The degree of permanence of the worker’s relationship with the potential employer; and
- Whether the worker’s work is part of an integrated unit of production.
Commentators have suggested that application of the independent contractor rule would likely result in more workers being classified as independent contractors rather than employees. President Joe Biden campaigned on the position that gig workers are often misclassified as independent contractors in order to deprive them of employee benefits and protection under employment laws. Thus, the DOL’s decision to rescind the independent contractor rule indicates that the Biden administration remains committed to establishing a more worker-friendly test to distinguish employees from independent contractors.
The DOL’s decision to rescind the joint employer and independent contractor rules signal that the Biden administration will likely take a more worker-friendly approach to these issues than the previous administration. Although the rules have not yet been finalized, employers who use staffing agencies should consider the risk of being held liable as joint employers for claims under the FLSA. In addition, businesses should use caution when classifying workers as independent contractors or employees and be mindful of potential liability under the FLSA for workers who are deemed employees.