U.S. Department of Labor withdraws informal guidance on joint employment, independent contractors

June 27, 2017|Thomas Schultz

Human resources and payroll departments need to be aware of changes surrounding joint employment status and independent contractor determinations. Administrative interpretations from 2015 and 2016 were rescinded by the Department of Labor (DOL) on June 7, 2017.

Properly classifying your employees can directly affect how payroll, benefits, unemployment insurance, and overtime pay are each handled. These role classifications also affect an employee’s eligibility for benefits, legal protections and tax status. Previously held administrator’s interpretations of the regulations were rolled back recently.

The DOL administrative guidance from 2015 and 2016 will no longer be used to determine joint employer status and independent contractor designations. The guidance had been put in place during the Obama administration in an attempt to provide clarity surrounding the regulations.

The 2015 administrative interpretation provided guidance on classifying workers as employees or independent workers in employment relationships, while the 2016 guidance looked at joint employment relationships under the Fair Labor Standards Act (FLSA).

Independent contractors

In simple terms, the general rule for an independent contractor is that the company only has the right to control or direct the result of the work, not how or what will be done. The person is considered an employee when the services performed are controlled by the company.

Employers will still be required to properly classify workers as employees or independent contractors. Going forward, most employers will use the Common Law test to determine the classification, which defines three categories: behavioral, financial and type of relationship.

Background on prior administrator's interpretation 2015-1 surrounding independent contractors

The withdrawn 2015 guidance outlined how the DOL applied the FLSA when determining whether someone is an independent contractor or an employee. While that guidance will no longer be used in determining joint employer status, an earlier article, Independent contractor or employee?, provides background on previously held applications of the regulations.

In summary, the 2015 interpretation noted that workers are often treated as independent contractors, when in fact they should be considered employees and benefit from certain wage and hour protections. The DOL’s opinion had been that "most workers are employees under the FLSA's broad definitions." In defining employees under the FLSA, it focused on the "economic realities" of the worker/employer relationship, and used criteria such as the degree of control exercised by the employer and the permanency of the relationship. The interpretation suggested they would increase enforcement efforts targeting independent contractors or temporary staffing arrangements.

Joint employers

A joint employment situation occurs when two or more employers share responsibility for overseeing workers’ payroll in terms of minimum wage and overtime compliance. The earlier informal guidance had increased scrutiny for small businesses and broadened potential liabilities for labor practices of third-party business partners.

Still in effect is the National Labor Relations Board’s process for determining joint employer status by applying two principles:

  1. They are both employers within the meaning of the common law; and
  2. They share or codetermine those matters governing the essential terms and conditions of employment.

There are still recognizable rules around joint employment whenever an employer has control over terms and conditions of employment. The issue here is where the “employee” is on-site through an intermediary, such as a staffing firm, or whether it has reserved the authority to do so.

Background on prior administrator's interpretation 2016-1 surrounding joint employers

As discussed in a previous article, Joint employers and what you need to know, we outlined the 2016 guidance provided by the DOL.

In this interpretation, the DOL attempted to broaden the joint employment standard to "achieve statutory coverage, financial recovery, and future compliance [with the FLSA]." The DOL signaled that it would likely target larger employers, and further outlined two types of joint employment relationships:

  • Horizontal joint employment, where two separate and related entities employ the employee
  • Vertical joint employment, where one entity contracts with another to provide services or staff, as with temporary staffing companies

What does this mean moving forward?

It has not yet been determined whether the DOL will issue new guidance in place of the withdrawn interpretations.

While the guidance has been rescinded, it does not change your legal responsibilities under FLSA and the Migrant and Seasonal Agricultural Worker Protection Act. Other agencies also oversee joint employer relationships, including the National Labor Relations Board (NLRB) and the Equal Employment Opportunity Commission (EEOC). The regulations governing independent contractors and joint employment, along with related case law decisions, should be followed.

We will continue to monitor and update you as needed.

For assistance understanding your joint employer and independent contractor compliance, contact Thomas Schultz or another member of Schenck’s HR Consulting team, or Schenck’s Payroll team, at 800-236-2246.

Thomas Schultz, PHR, SHRM-CP, is a manager – HR Consulting with Schenck. He has more than 25 years of human resources experience, including building human resource systems and structures that match the changing needs of businesses. He brings a broad blend of skills in areas such as leadership coaching, employee relations, benefits, training and development, change leadership and employment law.