The Department of Labor, Congress, and the Courts Wrestle with the Definition of “Employee”
The potential misclassification of employees as independent contractors received considerable attention from federal agencies during the Obama administration. The Wage and Hour Division of the DOL was skeptical of independent contractor status, issuing guidance that stated that “most workers are employees.” The Trump administration and Republican legislators seem intent on reversing this expansive definition of “employee.”
The DOL During the Obama Administration
As part of the DOL’s Wage and Hour Division’s initiative to combat worker misclassification under President Obama, the Division’s Administrator issued Administrator’s Interpretation No. 2015-1 on July 15, 2015 (“Interpretation”). The Interpretation advocated for a reading of the “economic realities test” that favored classifying most workers as employees rather than independent contractors under the FLSA.
The Interpretation pointed out that, to determine whether a worker should be classified as either an employee or an independent contractor under the FLSA, courts rely on the following six factors comprising the “economic realities test”: (i) the extent to which the work performed is an integral part of the employer’s business, (ii) the worker’s opportunity for profit or loss, (iii) the nature and extent of the worker’s investment in his or her business, (iv) whether the work performed requires special skill and initiative, (v) the permanency of the relationship, and (vi) the degree of control exercised or retained by the employer. The Interpretation advocated for interpretations of these factors that have not been universally applied by courts and would result in more workers being classified as employees rather than independent contractors.
Significantly, the Interpretation rejected courts’ historical emphasis on the “control” factor, and focused instead on workers’ entrepreneurial activities. Regarding the worker’s opportunity for profit or loss, the Interpretation argued that this factor should focus on not only the opportunity for profit or loss but also whether the worker has the ability to make decisions and use his or her managerial skill and initiative to affect opportunity for profit or loss. As to the nature and extent of a worker’s investment, the Interpretation stated that the worker’s investment must be substantial when compared to the putative employer’s investment for the worker to be engaged in an independent business.
The DOL During the Trump Administration
On June 7, 2017, Secretary Acosta announced that the DOL was withdrawing the Interpretation. It appears that the DOL has chosen to reject the previous administration’s interpretation of the “economic realities test,” which disfavored the independent contractor classification. If this is true, employers may anticipate seeing (i) less of an emphasis on workers’ entrepreneurial activities in DOL enforcement proceedings and (ii) a return to a focus on the degree of control exerted by the putative employer over workers.
In a move that may signal a further shift from the DOL’s policies under President Obama, on September 6, 2017, President Trump announced that he was nominating Cheryl Stanton, a former shareholder at a management-side employment firm, as Administrator of the Wage and Hour Division.
Courts’ Positions on Independent Contractors
Prior to its withdrawal, the Interpretation appears to have had minimal influence on how courts applied the “economic realities test” in misclassification cases. For example, in its March 2017 decision in Hall v. DirecTV LLC, 846 F.3d 757 (4th Cir. 2017), the Fourth Circuit reversed a district court decision dismissing the complaint in a putative FLSA collective action brought by a group of satellite television technicians. In holding that the plaintiffs’ adequately alleged that they were employees of DirecTV rather than independent contractors, the Fourth Circuit made no reference to the Interpretation. The appellate court did, however, note that the district court’s error was understandable “given the confused state of FLSA joint employment case law.”
Congress and the Save Local Business Act
The controversy surrounding independent contractor status and joint employment was not limited to FLSA matters. For example, in Browning-Ferris Industries of California, the NLRB found that a business could be deemed a joint employer if it exerts “indirect control” over a contractor or reserves for itself the ability to exert such control. In response, Republican legislators have introduced the Save Local Business Act, a bill that would amend both the NLRA and the FLSA to say the following:
A person may be considered a joint employer in relation to an employee only if such person directly, actually, and immediately, and not in a limited and routine manner, exercises significant control over the essential terms and conditions of employment (including hiring employees, discharging employees, determining individual employee rates of pay and benefits, day-to-day supervision of employees, assigning individual work schedules, positions, and tasks, and administering employee discipline).
Congress will consider the Save Local Business Act while simultaneously weighing other options. On September 6, 2017, the House Committee on Education and the Workforce held a hearing on the sharing economy and the protections that may be needed to protect the workers of companies such as Uber and Homejoy, who are typically classified as independent contractors.
Prior to its withdrawal, the Interpretation appears to have had minimal influence on how courts apply the “economic realities test” in misclassification cases. Likewise, the withdrawal of the Interpretation will likely have little effect on how courts apply the test. A legislative response to this confusion is a strong possibility, but for the time being, federal courts will continue to analyze whether a worker is an employee or independent contractor by applying their own versions of the “economic realities” test consistent with precedent.