DOL Proposes Changes to Independent Contractor and Joint Employer Determinations

The U.S. Department of Labor (“DOL”) announced two proposals last week to modify its current regulations.

First, the DOL has proposed to withdraw its January 6, 2021 rule that provides a test to determine whether a worker is an employee under the Fair Labor Standards Act (“FLSA”). The rule sets out a five-factor “economic realities” test used to classify a worker as either an employee or independent contractor. Employers are only obligated to comply with FLSA for their employees, but not for independent contractors. The test imposed under the rule provides a significant degree of flexibility and subjectivity, enabling employers to more easily classify workers as independent contractors when appropriate, and is on balance, positive for the franchising industry.

This rule was originally scheduled to go into effect on March 8, 2021, but the DOL has now proposed withdrawing this rule. If the rule were to be withdrawn, no new rule would be immediately issued in its place. The DOL states in its proposal that if the rule is withdrawn, it will take time to “consider legal and policy issues relating to the FLSA and independent contractors.” The DOL is accepting written comments on their proposal to withdraw until April 12, 2021.

Second, the DOL has proposed rescission of its January 2020 “joint employer rule,” which took effect March 16, 2020. This rule established a standard for when, and under what circumstances, two or more entities are considered “joint employers” of an employee for purposes of liability under labor laws. This new standard was positive for the franchising industry, as it emphasized the actual, direct control that an employer exerts over a worker in determining whether an entity is a joint employer.

In September 2020, a NY federal court invalidated the new rule based on the court’s finding that the change to the existing standards were “arbitrary and capricious,” inconsistent with prior rulings, and in conflict with other DOL policies and definitions. The DOL appealed the ruling and while this case is pending, the DOL has been in the process of re-examining the rule.

Now, the DOL has proposed rescinding the rule “to allow it to engage in further legal analysis, in order to ensure that lawful and clear guidance is being provided to the regulated community.”

The DOL has not proposed an alternate rule in its place at this time. However, the Biden administration has expressed support for returning to the “Obama-era” approach on this issue, under which a company can be held more broadly accountable for the wage violations of its business partners. An approach such as this may be what we can expect if the current rule is ultimately rescinded. The DOL is also accepting written comments on their proposal to rescind this rule until April 12, 2021.

If you have any questions about how this area of the law may affect your business, please reach out via e-mail at kristen.smith@stevenslee.com or by phone at 215.751.2874.