The More Things Change . . . The Department of Labor Withdraws Obama Era Employee Status Protections for Employees

Christopher T. James, Matthew S. Veech

July 3, 2017

Independent contractor or employee? Joint-employer liability? Exempt vs. non-exempt? These questions have major implications for business owners who rely heavily on independent contractors. Recent employment law updates will help business owners reduce their co-employment risk and avoid classification challenges and other employment-related liabilities. Here’s what you need to know.

In December 2016, we provided an update on the challenge by 21 states to the “Final Rule” issued by the Department of Labor (DOL) regarding proposed changes to the salary-basis test for exempt status for employees. At the time of that update, the future of this challenge was murky given the upcoming transition of power from the Obama administration to the Trump administration. Would a Trump administration DOL make any efforts to appeal the injunction placed on the new regulations related to the exemptions proposed by the Obama administration DOL?

Earlier this month we likely, albeit indirectly, got an answer to that question. On June 7, the DOL withdrew two “interpretative guidance letters” that they issued under the Obama administration, both of which were focused on the question of who is an employee’s employer? The first was related to the DOL’s interpretation of the definition of an “independent contractor” (guidance letter No. 2015-1), while the second refers to “joint employer” (guidance letter No. 2016-1).

Prior to the interpretative guidance of the DOL under the Obama administration, the traditional test for the determination regarding independent contractor/employee status was based on the “control” exerted over the individual’s work by the company. The more control exerted over the individual, the more likely the existence of an employer/employee relationship. Under the interpretative guidance of the Obama administration DOL however, the focus was shifted to the “economic realities” of the relationship between the company and the individual, with the focus being on the level of economic dependence of the individual to the company.

The end result of this change in focus was intended to lead to more individuals being classified as “employees,” thus making them eligible for minimum wage protections and overtime compensation. Additionally, the extra “employees” would expand the employment-related tax revenue for the federal government.

The second guidance letter that was withdrawn by the Trump administration DOL related to “joint employers,” most directly impacting franchise operations and staffing agencies. This guidance implied that the DOL would use a “vertical” analysis in analyzing these relationships, stating: “Vertical joint employment exists where the employee has an employment relationship with one employer (typically a staffing agency, subcontractor, labor provider or other intermediary employer) and the economic realities show that he or she is economically dependent on, and thus employment by, another entity involved in the work.”

This change in analysis created a new reality for employers regarding their liability. As an example of this extended liability, pursuant to this guidance of the DOL, employees of a McDonald’s franchise would likely be considered to be employees of the franchise as well as McDonald’s itself.

Taken together, these two interpretative guidance letters expanded the scope of identifying an employer, expanding the definition of employer, and providing more protections to employees. This was unwelcome news for many businesses that utilize independent contractors and for staffing agencies and franchisors because the DOL was opening up additional areas of liability and tax obligation for these businesses.

While the DOL Fact Sheets still address the Obama era guidance, these steps by the Trump administration leave doubt as to their future. The withdrawal of these interpretative guidance letters by the Trump administration DOL is new hope for these affected businesses. And finally, it is likely a sign that the Trump administration DOL has no intention of taking any steps to defend or appeal the decision of the Eastern District of Texas regarding the proposed regulations related to employee “exempt” status that we addressed last December.