July 30, 2017

U.S. Department of Labor Withdraws Independent Contractor and Joint Employment Guidance

In a positive development for employers, the United States Department of Labor (DOL) announced on Wednesday, June 7, 2017, that it is withdrawing two Interpretations issued during the Obama Administration.

Interpretation No. 2015-1 addressed the classification of independent contractors under the Fair Labor Standards Act (FLSA), and took the expansive view that most workers qualify as employees and are thus entitled to minimum wages and overtime pay.  Interpretation No. 2016-01 expanded the definition of “joint employment” under the FLSA and the Migrant and Seasonal Agriculture Protection Act (MSPA), allowing more workers to claim they were due wages by more than one company.

While these Interpretations were viewed by the Obama Administration as an effort to crack down on employee misclassification and tighten standards for determining joint employment, they created more legal risks for companies by calling into question longstanding work arrangements. The Interpretations were not law, but they served as a guide for the DOL’s Wage & Hour Division in its enforcement efforts. Withdrawal of the Interpretations signals that the Trump Administration DOL will be less aggressive in its enforcement efforts in these two areas; however, state laws may differ from federal laws with regard to independent contractor and joint employment status.

For example, Nevada and Arizona have adopted laws that allow for greater certainty for businesses. 

In 2015, Nevada enacted NRS 608.0155, which creates a presumption that a person is an independent contractor if he or she (1) possesses or has applied for an employer identification number or social security number, or has filed a tax return for a business or earnings from self-employment with the IRS in the previous year, (2) is required by the contract with the principal to hold any necessary state business registration, licenses, insurance or bonding, and (3) satisfies three or more of the following criteria:

  • the person has control and discretion over the means and manner of the performance of any work and the result of the work;
  • the person has control over the time the work is performed;
  • the person is not required to work exclusively for one principal;
  • the person is free to hire employees to assist with the work; and
  • the person contributes a substantial investment of capital in the business of the person.

In 2016, Arizona enacted A.R.S. ยง 23-1601, which creates a rebuttable presumption that an independent contractor relationship exists if the contractor signs a declaration acknowledging that (1) the contractor operates its own business, (2) the contractor is not an employee of the employing entity, (3) the employing entity does not restrict the contractor’s ability to perform services for other parties and expects that the contractor will provide services for other parties, (4) the contractor will be paid based on the work to be performed, not on a salary or hourly basis, and (5) the contractor is not covered by the employing entity’s health or workers compensation insurance. 

California law has principally relied on a multi-factor common law test to determine contractor vs. employee status. However, the California Supreme Court is currently considering an expansive definition of the word “employ.” In Dynamex Operations West v. Superior Court, 179 Cal. Rptr. 3d 69, the Second Appellate District rejected the traditional common law test based on whether the employer has the right to control the manner and means of accomplishing the result desired, in favor of defining the word “employ” to mean “to engage, suffer, or permit to work.” If upheld, Dynamex will result in the reclassification of many independent service providers as employees, entitling them to California’s wage and hour protections.

In light of these developments, employers should seek legal counsel when considering whether to engage someone as a contractor or employee, and to evaluate existing contractor arrangements to determine whether they satisfy these legal tests.