independent contractor

In a move likely to impact employers in a variety of industries, U.S. Secretary of Labor Alexander Acosta announced on June 7, 2017 that the Department of Labor has withdrawn the Administrator’s Interpretations (“AIs”) on independent contractor status and joint employment, which had been issued in 2015 and 2016, respectively, during the tenure of former President Barack Obama.

The DOL advised that the withdrawal of the two AIs “does not change the legal responsibilities of employers under the Fair Labor Standards Act . . . , as reflected in the department’s long-standing regulations and case law.” As discussed below, however, this announcement may reflect both a change in the DOL’s enforcement priorities going forward, and a return to the traditional standards regarding independent contractor and joint employment status that had been relied on by federal courts prior to the issuance of the AIs.

Independent Contractor Status

In determining whether a worker is properly classified as an independent contractor under the Fair Labor Standards Act (“FLSA”), courts have historically relied on the six-factor “economic realities test,” which considered: (1) the extent to which the work performed is an integral part of the employer’s business; (2) the worker’s opportunity for profit or loss; (3) the nature and extent of the worker’s investment in his/her business; (4) whether the work performed requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer. While no single factor was meant to be determinative, courts typically placed primary emphasis on the degree of control exercised by the putative employer.

Under the Obama administration, the DOL increased its emphasis on the potential misclassification of workers as independent contractors. As part of this initiative, the agency issued Administrator’s Interpretation No. 2015-1 on July 15, 2015.  While this guidance nominally reaffirmed DOL’s support for use of the “economic realities test” to determine independent contractor status, it reflected a far more aggressive interpretation of several of the six “economic realities” factors than that historically used by courts, and emphasized the agency’s position that most workers should be classified as employees under the FLSA.

The 2015 AI rejected courts’ historical emphasis on the “control” factor, and focused instead on workers’ entrepreneurial activities, and whether they were “economically dependent” on the putative employer or actually in business for themselves. For example, while courts had merely considered whether a worker had an opportunity for profit or loss, the AI emphasized that the critical inquiry should be whether the worker had the ability to make decisions and use his/her managerial skill and initiative to affect the opportunity for profit or loss.  Similarly, while courts focused on the nature and extent of a worker’s investment in his/her business, the AI stated that a worker’s investment must be significant in magnitude when compared to the employer’s investment in its overall business, in order for the worker to properly be classified as an independent businessperson.  The AI further indicated that courts had been focusing on the wrong criteria when evaluating whether workers possessed “special skills,” stating that only business skills, judgment, and initiative, not specialized technical skills, were relevant to the independent contractor inquiry.

With the withdrawal of the 2015 AI, one may reasonably assume that the DOL has chosen to reject this more aggressive interpretation of the “economic realities test,” and return to the traditional independent contractor analysis used by courts before the AI was issued. If this is the case, employers may expect to see a decreased emphasis on workers’ entrepreneurial activities in DOL enforcement proceedings, and a return to the previous emphasis on the degree of control exerted by the putative employer over workers.

It remains to be seen whether this withdrawal indicates that the current administration views potential misclassification of independent contractors as less of a priority than the previous administration did. A key barometer will be the level of DOL activity in agency audits or enforcement actions related to independent contractor status.  Any change in the DOL’s focus, however, will likely not impact the spread of misclassification litigation (including class and collective actions), which has continued to increase in recent years.

Joint Employment

With the recent growth of the “fissured workplace” or “gig economy,” the Obama administration also directed significant attention to the concept of joint employment.  In light of this development, the former Administrator of the DOL’s Wage and Hour Division issued Administrator’s Interpretation No. 2016-1 on January 20, 2016, to clarify DOL’s position on the increasing number of circumstances under which two or more entities may be deemed joint employers.

In its August 2015 decision in Browning-Ferris Industries of California, Inc., the National Labor Relations Board expanded the concept of joint employment under the National Labor Relations Act, holding that two entities may be joint employers if one exercises either direct or indirect control over the terms and conditions of the other’s employees or reserves the right to do so.  The 2016 AI similarly expanded the circumstances under which the DOL would deem two entities to be joint employers under the FLSA.

For the first time, the AI differentiated between two different types of joint employment. The existing joint employment regulations were deemed to apply to “horizontal joint employment,” a situation where a worker has an employment relationship with two or more related or commonly owned business entities.  “Vertical joint employment,” on the other hand, would exist where an individual performed work for an intermediary employer, but was also economically dependent on another employer, such as a staffing agency.  The AI stated that, in horizontal joint employment scenarios, the DOL would apply the FLSA regulations to assess whether a joint employment relationship existed between the two business entities.  In a vertical joint employment scenario, however, DOL would focus on the relationship between the worker and each business entity, applying the “economic realities test” to determine whether the worker was economically dependent on the potential joint employer(s).

The AI made it clear that the purpose of this revised analysis was to expand the number of businesses deemed employers under the FLSA, stating that “[t]he concept of joint employment, like employment generally, should be defined expansively under the FLSA . . . .” This would, in turn, increase the number of entities potentially liable for wage and hour violations, allowing employees and the DOL to pursue claims against multiple potential employers simultaneously.

With the withdrawal of the 2016 AI, presumably the DOL has chosen to reject the more expansive horizontal/vertical joint employment analysis, and the agency’s stated intent to rely on the “economic realities test” in the joint employment context. Instead, the agency will likely rely on the existing regulations regarding joint employment, which state that a joint employment relationship may exist where: (1) there is an arrangement between employers to share an employee’s services; (2) one employer is acting directly or indirectly in the interest of the other employer(s) in relation to an employee; or (3) multiple employers are not completely disassociated with respect to the employment of a particular employee, and may be deemed to share direct or indirect control of the employee by virtue of the fact that one employer controls, is controlled by, or is under common control with the other employer(s).

Similarly, as with the independent contractor scenario, the DOL’s withdrawal of the 2016 AI may reflect a change in DOL’s enforcement priorities with regard to joint employment. As noted above, however, any such change in administrative priorities will likely not affect the scope of private litigation in this area.

Impact on Employers

While the DOL’s action does not impact employers’ legal responsibilities under the FLSA, this change presumably reflects a reversion to the traditional independent contractor and joint employment standards that were in effect prior to the issuance of the AIs. The withdrawal of the AIs may reflect a shift in the DOL’s enforcement priorities, but private litigation regarding independent contractor and joint employment status remains prevalent.

Michael D. ThompsonOn January 14, 2015, in Hargrove v. Sleepy’s LLC, the New Jersey Supreme Court answered a certified question from the Third Circuit and held that the “ABC” test governs whether a plaintiff is an employee or an independent contractor under the New Jersey Wage Payment Law and the New Jersey Wage and Hour Law.

Therefore, companies defending their independent contractor classifications in either litigation or government investigations under these statutes will be required to show that an individual providing services:

(A)       is free from the company’s control in performing the services;

(B)       performs work outside the usual course of the company’s business or outside the company’s place of business; and

(C)       is engaged in an independently established business.

The plaintiffs in Hargrove v. Sleepy’s delivered mattresses for Sleepy’s, and filed suit under the New Jersey Wage Payment law (and several other statutes) alleging that Sleepy’s misclassified them as independent contractors.  The case was litigated before the U.S. District Court for the District of New Jersey.

Sleepy’s argued that plaintiffs’ status as employees should be decided under the “right to control” test applied by to ERISA claims by the United States Supreme Court in Nationwide Mutual Ins. Co. v. Darden.

The District Court applied the “right to control” test and concluded that the plaintiffs were, in fact, independent contractors.  The plaintiffs appealed to the Third Circuit Court of Appeals.

In May 2013, the Third Circuit petitioned the New Jersey Supreme Court to answer the following question:

Under New Jersey law, which test should a court apply to determine a plaintiff’s employment status for purposes of the New Jersey Wage Payment Law, N.J.S.A. § 34:11-4.1, et seq., and the New Jersey Wage and Hour Law, N.J.S.A. § 34:11-56a, et seq.?

Seal of the Supreme Court of New JerseyThe New Jersey Supreme Court granted the petition by the Third Circuit.

The New Jersey Supreme Court noted that neither the Wage Payment Law nor its regulations provide criteria for distinguishing between an employee and an independent contractor.  However, the New Jersey Department of Labor and Workforce Development’s regulations implementing the Wage Hour Law expressly provide that the distinction between an employee and an independent contractor should be resolved by reference to the ‘ABC’ test.”

The Supreme Court of New Jersey stated that the “express purpose” of both statutes is to foster “the provision of greater income security for workers.”  The Court asserted that the “ABC” test “operates to provide more predictability” than other tests of independent contractor status, and that there was no good reason “to depart from the standard adopted by the DOL to guide employment status determinations or to disregard the long-standing practice of treating both statutory schemes in tandem.”

For those reasons, the New Jersey Supreme court held that any dispute regarding independent contractor status arising under the Wage Payment Law and the Wage and Hour Law should be resolved by utilizing the “ABC” test.

The decision in Hargrove v. Sleepy’s is important in large part because the “ABC” test is significantly different from other independent contractor tests.  In particular, employers should scrutinize the New Jersey Supreme Court’s description of part C of the test as (requiring an independently-established business):

Therefore, part C of the “ABC” test is satisfied when an individual has a profession that will plainly persist despite the termination of the challenged relationship… When the relationship ends and the individual joins the ranks of the unemployed, this element of the test is not satisfied.

Accordingly, New Jersey employers should further examine their independent contractor relationships against the criteria of the “ABC” test.

By: Michael D. Thompson

ESPN broadcaster Keith Olbermann recently held a mock press conference in which he pretended to be the new Commissioner of Baseball, and explained how he would improve the game in that role.  For example, World Series games would start early enough for kids to watch them, the designated hitter would be eliminated, and Vin Scully would call all World Series games.

I’d like to do something similar.  I am pleased to inform you that, for the rest of this blog entry, let’s assume that I am the new Secretary of Labor.

Effective immediately:

  1. An employer’s liability to inadvertently misclassified employees will be limited to half-time (rather than time-and-a-half) if the employer has a published policy, and receives a signed acknowledgment, stating: “I understand that my salary is intended to compensate me for all hours worked in any given workweek.”
  2. If an individual has an independently-established business, he or she is an independent contractor. Case closed. Anyone who has the wherewithal to set up his or her own business is capable of making a decision about whether the terms of a business relationship are acceptable.
  3. New Jersey’s child labor law exception allowing minors under the age of 16 to work as beekeepers is preempted by a new federal regulation to the contrary. Okay, this one does not come up much.  But do we really want a law that says a 15-year old can be left in charge of a charge of a swarm of bees?  That sounds like a Hitchcock movie.
  4. The “professional” exemption’s focus on jobs held by employees who get their advanced knowledge in school is expanded.  The exemption now extends explicitly to jobs requiring “knowledge of an advanced type customarily acquired through five or more years of on-the-job experience.”
  5. Employers do NOT have to pay employees who only worked overtime because they played fantasy football or shopped online during regular hours.
  6. The “administrative” exemption will now be called the “independent judgment” exemption, and will apply to any employee with a salary of at least $800 per week who normally exercises discretion and independent judgment. The part of the “administrative” exemption requiring that the employee’s primary duty must be administrative in nature is eliminated because the Courts never seemed clear on how to apply it.

Let’s get to work.

 

 

 

 

By Frederick Dawkins and Douglas Weiner

Earlier this month, at the ABA Labor and Employment Law Conference, Solicitor of Labor M. Patricia Smith reaffirmed that investigating independent contractors as misclassified remains a top priority of the U.S. Department of Labor’s (“DOL”) enforcement initiatives.  The DOL will continue to work with other federal and state agencies, including the IRS, to share information and jointly investigate claims of worker misclassification.  The joint enforcement effort is certainly driven by, among other things, an interest in collecting unpaid tax revenue, and could result in significant liability to employers.

In addition to potential liability resulting from strengthened federal enforcement initiatives, in previous blog posts, we have emphasized that misclassification could become the subject of the next wave of class and collective actions, particularly in view of states enacting new legislation providing for higher penalties.  Further, the re-election of President Obama may augur the re-emergence of the Employee Misclassification Prevention Act, would require employers to keep records of all workers performing labor or services for them, and to notify each worker of their classification and exemption status.  Finally, the Affordable Care Act (“ACA”) adds yet another challenge to employee misclassifications as the reclassification of workers from independent contractors to employees could push an employer over the 50 full-time employee threshold for ACA coverage.

The expenses of  misclassification are often significant – including calculations of unpaid overtime wages, back employment taxes, income tax withholdings, unpaid workers’ compensation and unemployment insurance premiums, contributions to Social Security and Medicare, and perhaps 401K matching and pension contributions.

In short, over the next four years of the Obama Administration, which will continue to fund the DOL’s aggressive enforcement efforts, it is undeniable that contractor misclassification investigations will continue to increase in volume and strength.  Employers are best advised to scrutinize their own independent contractor classifications in self-audits before federal and state investigators, or perhaps even worse, plaintiffs’ class action lawyers target what had been common practices.

By Michael Kun

Last week, the U.S. Department of Labor’s Wage and Hour Division and the California Secretary of Labor announced that they were teaming up to crack down on employers who classify workers as independent contractors.  http://www.dol.gov/opa/media/press/whd/WHD20120257.htm

The announcement that the two groups would work together on such an initiative should not come as much of a surprise to employers.  Shortly after Hilda Solis took office as the U.S. Secretary of Labor, the Wage and Hour Division announced that it would be focusing on this issue.  And California has enacted a new statute that provides additional penalties in cases where workers are found to have been misclassified as independent contractors.  Simply put, the classification of workers as independent contractors is today’s “hot issue.”

While last week’s announcement may not be a surprise, it serves as a valuable reminder to employers that contract out services that they should review those relationships closely to ensure that workers are properly classified as independent contractors – and to make careful changes to the relationship should they not be.  Why must those changes be careful?  Because in some jurisdictions, including California, changes to practices can be construed as evidence that the past practice was unlawful.  In this way, seeking to correct a problem can lead to the very lawsuit you were seeking to avoid.

Unfortunately, there is not a single, universally accepted definition of “independent contractor.”  The IRS has one definition.  The DOL has another.  Various federal and state agencies have their own definitions, and the courts have crafted even more definitions in the tort and employment contexts. What the various definitions all have in common is the element of control.  To the extent an employer controls the manner in which a worker provides services – setting hours of work, providing the tools for the work, directing the manner in which the work is performed, or otherwise controlling the worker’s activities – those could all be indicia of an employment relationship, rather than an independent contractor relationship.  Similarly, if the worker wears the employer’s uniform, wears a badge with the employer’s name on it, or provides the worker with business cards bearing the company’s name, that could also suggest that the worker in fact is an employee, not an independent contractor.  The fact that you may call the worker an “independent contractor,” or that you have a contract using that term, ultimately means little.  It’s the actual relationship that will govern in any analysis.

Employers who have independent contractors performing the same work as their employees should be particularly concerned about these issues.  And those who reacted to the recession by laying off employees, only to bring back those same persons to perform the same job as independent contractors – without benefits, payroll withholdings and workers’ compensation – are squarely within the crosshairs of federal and state agencies.  And plaintiffs’ lawyers.

But they are not the only ones who should review their relationships with persons or companies with which they contract for the provisions of services.  Employers who contract with janitorial services — or office management services, or catering services — should also review those relationships, particularly if they are with companies whose funding is suspect.  If the employees of those companies don’t get paid, or don’t get paid properly, it’s not unusual for them to claim that they in fact were employed not just by that company, but you.  And if you give directions to that janitor – or office services person, or server – don’t be surprised if the DOL claims that he or she is your employee.