On June 7, 2017, the U.S. Department of Labor (DOL) withdrew two guidances, one a 2015 administrative interpretation on classifying workers as employees or independent contractors, and the other a 2016 guidance regarding joint employment. Both withdrawals are effective immediately. Details regarding the impact these guidance withdrawals will have on employers are included below.
Worker Classification Guidance
Worker classification has a direct impact on employee eligibility for benefits, legal protections and taxation. By withdrawing the 2015 guidance, the DOL is returning to more reliance on existing judicial interpretations of the law’s requirements, rather than providing its own guidance on how employers should follow the law.
Despite the withdrawal, employers will still be required to properly classify their workers as employees or independent contractors. The DOL has stated it “will continue to fully and fairly enforce all laws within its jurisdiction, including the Fair Labor Standards Act.”
The absence of this guidance means employers must determine how to satisfy tests established by the courts – specifically the economic realities test – when deciding whether an employee or independent contractor relationship exists.
Economic Realities Test
Worker classification has a direct impact on employee eligibility for benefits, legal protections (such as minimum wage and overtime rights) and taxation. In general, employment laws, labor laws, and related tax requirements do not apply to independent contractors. For this reason, employee misclassification is a concern for the DOL.
The DOL has traditionally favored using the economic realities test for worker classification purposes. The withdrawal of the 2015 guidance does not abolish the economic realities test nor will it deter the DOL’s preference of the test.
The most common factors used for purposes of the economic realities test are:
- The degree of the employer’s right to control the manner in which work is performed;
- The degree of skill required to perform the work;
- The worker’s investment in the business;
- The permanence of the working relationship;
- The worker’s opportunity for profit or loss; and
- The extent to which the work is an integral part of the business.
No action is required of employers at this time. However, employers using the DOL’s 2015 guidance may have more flexibility in applying the economic realities test when classifying their workers. Employers should evaluate whether their current classification procedures are affected by the withdrawal of this guidance.
Joint Employment Guidance
In 2016, this guidance was issued by the DOL to help employers identify joint employment situations, and to prevent employers from using intermediaries to protect themselves from liability under the Fair Labor Standards Act (FLSA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA). The withdrawal will affect compliance with the FLSA and MSPA.
Joint employment occurs when an employee works for two or more related employers. When joint employment exists, all joint employers are jointly and severally liable for compliance with applicable laws. Additionally, in joint employment situations, an employee’s hours worked for all of the joint employers during the workweek are aggregated and considered one employment. As a result, that employee’s overtime compensation depends on whether his or her aggregate hours of work exceed the limits set by FLSA or MSPA.
Impact on Employers
The withdrawal of the guidance does not relieve employers from joint employment liability. Rather, the DOL is returning to its 2015 policy where joint employment can be established only when an employer has direct control over another employer’s workplace. This change will limit the number of situations where the DOL may hold employers liable for FLSA and MSPA violations committed by affiliated entities.
Employers should review and update policies and procedures they use to determine whether they are in a joint employment situation.
For additional information on the withdrawal of the DOL’s Worker Classification and Joint Employment Guidances, download and read the full compliance bulletins below.
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