Earlier today, the Ninth Circuit issued its opinion in cases involving the Department of Labor’s (“DOL”) “80/20 Rule” regarding what is commonly referred to as “sidework” in the restaurant industry.  Agreeing with the arguments made by our new colleague Paul DeCamp, among others, the Ninth Circuit issued a decidedly employer-friendly decision.  In so doing, it disagreed with the Eighth Circuit, potentially setting the issue up for resolution by the United States Supreme Court.

As those in the restaurant industry are aware, restaurant workers and other tipped employees often perform a mix of activities in the course of carrying out their jobs.  Some tasks, such as taking a customers’ orders or delivering their food, may contribute directly to generating tips.  Other tasks, such as clearing tables, rolling silverware, and refilling salt and pepper shakers—activity generally known in the industry as “sidework”— arguably generate tips indirectly.

In 1988, the DOL issued internal agency guidance purporting to impose limits on an employer’s ability to pay employees at a tipped wage, which under federal law can be as low as $2.13 per hour, if employees spend more than 20% of their working time on sidework.  This guidance, commonly known as the “80/20 Rule,” has led to a wave of class and collective action litigation across the country, including a 2011 decision from the U.S. Court of Appeals for the Eighth Circuit deferring to the Department’s guidance as a reasonable interpretation of the Fair Labor Standards Act (“FLSA”) and its regulations.

Today, the Ninth Circuit issued a 2-1 decision in Marsh v. J. Alexander’s LLC, concluding that the Department’s attempt to put time limitations on how much sidework an employee can perform at a tipped wage is contrary to the FLSA and its regulations and thus unworthy of deference by the courts.

The Department adopted the 20% limitation as a purported clarification of the Department’s “dual jobs” regulation, which addresses employees who work in separate tipped and non-tipped jobs for the same employer.  The Ninth Circuit explained, however, that the 20% limitation on sidework was inconsistent with the statutory notion of an “occupation,” as well as the regulation’s focus on two distinct jobs.

Because the 80/20 Rule did not in reality stem from the statute or the regulations, the Court determined that it constitutes “an alternative regulatory approach with new substantive rules that regulate how employees spend their time” and thus amounts to a “‘new regulation’ masquerading as an interpretation.”

In reaching this conclusion, the Court disagreed with the Eighth Circuit’s analysis and conclusion, noting that “the Eighth Circuit failed to consider the regulatory scheme as a whole, and it therefore missed the threshold question whether it is reasonable to determine that an employee is engaged in a second ‘job’ by time-tracking an employee’s discrete tasks, categorizing them, and accounting for minutes spent in various activities.”

The plaintiffs in these cases may well seek rehearing en banc, and it remains to be seen what approach the Department will take regarding the 80/20 Rule in response to today’s decision. And the split between the circuits certainly suggests that this is an issue that may well be resolved by the Supreme Court.

On September 5, 2017, the Department of Labor filed with the Fifth Circuit an unopposed motion asking the court to dismiss its appeal of the nationwide preliminary injunction ruling issued last November by a Judge Amos Mazzant in the Eastern District of Texas.  The motion states that DOL’s appeal is moot in light of Judge Mazzant’s entry of final judgment on August 31, 2017.  Barring any unusual further developments, we anticipate that the Fifth Circuit will dismiss the appeal promptly.

By withdrawing the appeal, the Department is signaling that it intends to abandon the 2016 Final rule and, instead, to proceed with a new rulemaking in line with the Request for Information (“RFI”) the Department issued on July 26, 2017.  That RFI seeks public input regarding what salary level or levels, if any, the Department should use in place of the 2016 figures in order to update the $455 weekly / $23,660 annual salary requirement for the executive, administrative, and professional exemptions implemented in the Department’s 2004 rulemaking, as well as the $100,000 annual compensation threshold for the highly-compensated variant of these exemptions.

The comment period for the RFI currently ends on September 25, 2017.  To date, regulations.gov has received more than 138,000 comments in response to the RFI, though most of the comments appear to be identical submissions by numerous different commenters, as is common for this type of rulemaking.  Watch for a Notice of Proposed Rulemaking announcing a new salary level for the executive, administrative, and professional exemptions in the next few months.

 

Since last November, much of the discussion regarding the Obama-era overtime regulations that, among other things, more than doubled the minimum salary threshold for executive, administrative, and professional employees under the Fair Labor Standards Act (“FLSA”) has focused on the Department of Labor’s appeal of the nationwide preliminary injunction barring implementation and enforcement of the rule.

While everyone is awaiting the oral argument before the Fifth Circuit, currently scheduled for October 3, 2017, Judge Amos Mazzant of the Eastern District of Texas once again issued a bold ruling sure to grab the public’s attention.

On August 31, 2017, Judge Mazzant granted summary judgment in favor of the plaintiffs in the two consolidated cases challenging the overtime rule, holding that the salary level the Department selected in 2016 conflicts with the FLSA, Nevada v. U.S. Department of Labor and Plano Chamber of Commerce, E.D. Tex. No. 4:16-CV-731.

After dealing with preliminary procedural issues including standing, ripeness, and the applicability of the FLSA to the States, Judge Mazzant focused on the substance of the 2016 rule.  Applying the legal framework set forth in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43 (1984), the Court determined that the statutory language establishing the exemptions, section 13(a)(1) of the FLSA, 29 U.S.C. § 213(a)(1), “is unambiguous because the plain meanings of the words in the statute indicate Congress’s intent for employees doing ‘bona fide executive, administrative, or professional capacity’ duties to be exempt from overtime pay.”  (Slip Op. at 13.)

In the Court’s words, “the Department does not have the authority to use a salary-level test that will effectively eliminate the duties test as prescribed by” the FLSA.  (Slip Op. at 14.)  “Nor does the Department have the authority to categorically exclude those who perform ‘bona fide executive, administrative, or professional capacity’ duties based on salary level alone.”  (Id.)

In short, “[t]he updated salary-level test under the Final Rule does not give effect to Congress’s unambiguous intent.”  (Slip Op. at 14.)  The Court noted that “[t]he Department estimates 4.2 million workers currently ineligible for overtime, and who fall below the minimum salary level, will automatically become eligible under the Final Rule without a change to their duties.”  (Id. at 16.)

The Court held that “the Department’s Final Rule is not ‘based on a permissible construction’ of Section 213(a)(1)” because by “doubl[ing] the previous minimum salary level” the regulation “eliminates a consideration of whether an employee performs ‘bona fide executive, administrative, or professional capacity’ duties.”  (Slip Op. at 16-17.)  For Judge Mazzant, “[t]he Department has exceeded its authority and gone too far with the Final Rule.  Nothing in Section 213(a)(1) allows the Department to make salary rather than an employee’s duties determinative of whether” an employee “should be exempt from overtime pay.  Accordingly, the Final Rule is not a reasonable interpretation of Section 213(a)(1) and thus is not entitled to Chevron deference.”  (Id. at 17.)

The Court also struck down the regulation’s mechanism for automatically updating the minimum salary threshold every three years.  (Slip Op. at 17.)

In a portion of the decision that may have a direct effect on the pending appeal, the Court “acknowledges its injunction order might have been confusing” insofar as some have read that decision as “invalidat[ing] all versions of the salary-level test that the Department has used for the last seventy-five years.”  (Slip Op. at 4 n.1.)

The Court clarified that “the Department has the authority to implement a salary-level test” and that the summary judgment ruling “is not making any assessments regarding the general lawfulness of the salary-level test or the Department’s authority to implement such a test.  Instead, the Court is evaluating only the salary-level test as amended by the Department’s Final Rule, which is invalid under both steps of Chevron.”  (Id. at 13 n.5.)

As a result of Judge Mazzant’s ruling, the pending appeal may be moot.  The Department’s reply brief before the Fifth Circuit expressly disavowed a defense of the salary level selected in the Final Rule, instead asking the Fifth Circuit to rule only on the question of whether the Department has the authority to implement a salary-level test at all.  Judge Mazzant’s decision acknowledges that the Department has that authority, which appears to address the Department’s concern. In light of the decision, the Department may well withdraw its appeal.

In Moon et al v. Breathless, Inc., the Third Circuit reviewed the dismissal of a class and collective action under the Fair Labor Standards Act, the New Jersey Wage and Hour Law and the New Jersey Wage Payment Law.  The District Court for the District of New Jersey had dismissed the named plaintiff’s claims based on an arbitration clause in the written agreement between the her and Breathless, the club where she worked as a dancer.

In her lawsuit, the plaintiff alleged that she and other dancers were misclassified as independent contractors, and that Breathless unlawfully failed to pay them minimum wages and overtime pay.

In response, Breathless pointed to an agreement signed by the plaintiff stating that she was an independent contractor and not an employee. Breathless moved for summary judgment based on language in the agreement stating: “In a dispute between [the plaintiff and Breathless] under this Agreement, either may request to resolve the dispute by binding arbitration.”

The Third Circuit noted that, under New Jersey law, there is a presumption that a court will decide any issues concerning arbitrability. Finding no evidence to overcome that presumption, the Circuit Court proceeded to decide whether the plaintiff was required to submit her class and collective action claims to arbitration.

The New Jersey Supreme Court’s decisions in Garfinkel v. Morristown Obstetrics & Gynecology Assocs. and Atalese v. U.S. Legal Servs. Grp. were determinative of the scope of the arbitration agreement in this case, concluded the Third Circuit.

In Garfinkel, the arbitration provision in a contract stated it applied to “any controversy or claim arising out of, or relating to, this Agreement or the breach thereof.”  That language that suggested that the parties intended to arbitrate only those disputes “involving a contract term, a condition of employment, or some other element of the contract itself.”  Accordingly, the plaintiff in Garfinkel was not compelled to arbitrate his statutory claims.

In Atalese, the arbitration provision in a service agreement covered “any claim or dispute … related to this Agreement or related to any performance of any services related to this Agreement.”  That language “did not clearly and unambiguously signal to plaintiff that she was surrendering her right to pursue her statutory claims in court,” and therefore the plaintiff was not required to arbitrate those claims.

By contrast, the New Jersey Supreme Court required the arbitration of statutory claims in Martindale v. Sandvik, Inc., where the arbitration clause in an employment agreement stated that plaintiff agreed to waive her “right to a jury trial in any action or proceeding related to [her] employment…”

Because the arbitration agreement in the plaintiff’s agreement with Breathless applied to disputes “under this Agreement,” without reference to statutory wage claims, the Third Circuit applied Garfinkel and Atalese to conclude that Moon was not required to arbitrate her statutory claims under the FLSA and New Jersey law.

The award of summary judgment in favor of Breathless was therefore reversed, and the case was remanded to the District Court.

While the laws of other states may vary, the Third Circuit’s decision suggests that, at the very least, employers in New Jersey should expressly reference statutory wage claims in arbitration provisions if they intend to have statutory wage claims arbitrated.

We have previously written in this space about the United States Supreme Court’s decision in Integrity Staffing Solutions, Inc. v. Busk, holding that time spent awaiting bag checks was not compensable time under the Fair Labor Standards Act (“FLSA”). But is such time compensable under California law, which differs from the FLSA in some regards? The critical difference between the FLSA and California laws is that California law requires that employees be paid for all time when they are “subject to the control of the employer” or for all time that they are “suffered or permitted to work.” And, not surprisingly, plaintiffs’ lawyers in California have argued that employees are “subject to the control of the employer” and “suffered” to work while they wait for and participate in bag checks or security screenings.

Faced with this issue, the Ninth Circuit Court of Appeals has turned to the California Supreme Court for guidance, as it has done on several other wage hour issues in recent years. The case before the Ninth Circuit is Frlekin v. Apple, Inc., a case about which we have written previously. In Frlekin, the district court entered summary judgment in favor of Apple with regard to the compensability of bag check time. Granting summary judgment to Apple, the Court concluded that the time was not “hours worked” because the searches were peripheral to the employees’ job duties and could be avoided if the employees chose not to bring bags to work.

On appeal, the U.S. Court of Appeals for the Ninth Circuit essentially threw up its hands, concluding that it did not have enough guidance on whether such time would be compensable under California law. Accordingly, it certified to the California Supreme Court the following question:

Is time spent on the employer’s premises waiting for, and undergoing, required exit searches of packages or bags voluntarily brought to work purely for personal convenience by employees compensable as “hours worked” within the meaning of California Industrial Welfare Commission Wage Order No. 7?

In doing so, the Court recognized that California law differs in some respects from federal law on whether such time is compensable. The Court opined that the case seems to fall somewhere between decisions focusing on whether an employee has the ability to avoid the time, which could apply here because the employees have the option of avoiding a search by not bringing a bag to work in the first place, and decisions focusing on the control the employer exerts over the employees, which could apply here because the employees are under the employer’s control in the workplace.

As the Court noted, “[o]nce an employee has crossed the threshold of a work site where valuable goods are stored, an employer’s significant interest in preventing theft arises.” In light of the benefit to the employer in avoiding shrinkage, “[i]t is unclear . . . whether, in the context of on-site time during which an employee’s actions and movements are compelled, the antecedent choice of the employee obviates the compensation requirement.”  The Court suggested that the answer may turn on whether “as a practical matter” employees do not truly have the option of not bringing a bag to work.

Time will tell how the California Supreme Court elects to answer this question. It will likely take at least a year, if not substantially longer, for the Court to issue a ruling. In the meantime, employers in California should review their security practices and consider whether options exist to devise practices that obviate these concerns or at least reduce the associated risk.

When: Thursday, September 14, 2017 8:00 a.m. – 4:30 p.m.

Where: New York Hilton Midtown, 1335 Avenue of the Americas, New York, NY 10019

Epstein Becker Green’s Annual Workforce Management Briefing will focus on the latest developments in labor and employment law, including:

  • Immigration
  • Global Executive Compensation
  • Artificial Intelligence
  • Internal Cyber Threats
  • Pay Equity
  • People Analytics in Hiring
  • Gig Economy
  • Wage and Hour
  • Paid and Unpaid Leave
  • Trade Secret Misappropriation
  • Ethics

We will start the day with two morning Plenary Sessions. The first session is kicked off with Philip A. Miscimarra, Chairman of the National Labor Relations Board (NLRB).

We are thrilled to welcome back speakers from the U.S. Chamber of Commerce. Marc Freedman and Katie Mahoney will speak on the latest policy developments in Washington, D.C., that impact employers nationwide during the second plenary session.

Morning and afternoon breakout workshop sessions are being led by attorneys at Epstein Becker Green – including some contributors to this blog! Commissioner of the Equal Employment Opportunity Commission, Chai R. Feldblum, will be making remarks in the afternoon before attendees break into their afternoon workshops. We are also looking forward to hearing from our keynote speaker, Bret Baier, Chief Political Anchor of FOX News Channel and Anchor of Special Report with Bret Baier.

View the full briefing agenda and workshop descriptions here.

Visit the briefing website for more information and to register, and contact Sylwia Faszczewska or Elizabeth Gannon with questions. Seating is limited.

In a much anticipated filing with the Fifth Circuit Court of Appeal in State of Nevada, et a. v. United States Department of Labor, et al, the United States Department of Labor has made clear that it is not defending the Obama Administration’s overtime rule that would more than double the threshold for employees to qualify for most overtime exemptions. However, the Department has taken up the appeal filed by the previous Administration to reverse the preliminary injunction issued blocking implementation of the rule, requesting that the Court overturn as erroneous the Eastern District of Texas’ finding, and reaffirm the Department’s authority to establish a salary level test. And the Department has requested that the Court not address the validity of the specific salary level set by the 2016 final rule because the Department intends to revisit the salary level threshold through new rulemaking.

The litigation stems from action taken by the Department in May 2016 to issue a final rule that would have increased the minimum salary threshold for most overtime exemptions under the Fair Labor Standards Act (“FLSA”) from $23,660 per year to $47,476 per year. The rule was scheduled to become effective on December 1, 2016, but a federal judge issued a temporary injunction blocking its implementation just days beforehand.

Section 13(a) of the FLSA exempts from the Act’s minimum wage and overtime pay requirements “any employee employed in a bona fide executive, administrative, or professional [(“EAP”)] capacity * * * [specifically providing,] as such terms are defined and delimited from time to time by regulations of the Secretary [of Labor].” 29 U.S.C. § 213(a)(1). To be subject to this exemption, a worker must (1) be paid on a salary basis; (2) earn a specified salary level; and (3) satisfy a duties test.  In enjoining the 2016 rule, the District Court for the Eastern District of Texas reasoned that the salary-level component of this three-part test is unlawful, concluding that “Congress defined the EAP exemption with regard to duties, which does not include a minimum salary level,” and that the statute “does not grant the Department the authority to utilize a salary-level test.”

In seeking reversal of the preliminary injunction, the Department has argued that the Fifth Circuit expressly rejected the claim that the salary-level test is unlawful in Wirtz v. Mississippi Publishers Corp. In Wirtz, the Court reasoned that “[t]he statute gives the Secretary broad latitude to ‘define and delimit’ the meaning of the term ‘bona fide executive * * * capacity,” and he rejected the contention that “the minimum salary requirement is arbitrary or capricious.”  Further, the Department argues that every circuit to consider the issue has upheld the salary-level test as a permissible component of the EAP regulations.

By many accounts, the Department’s recently-appointed Labor Secretary, Alexander Acosta, has made clear that he does not think the salary level should be at $47,476 per year, but rather set at a more reasonable level between $30,000 and $35,000 per year. While Secretary Acosta may disagree with the salary level of the 2016 rule, the Department’s brief seems to make clear that he wants to ensure that he has the authority to set any salary threshold.

In issuing the preliminary injunction, the District Court did not address the validity of the salary level threshold set by the 2016 rule. Because the injunction rested on the legal conclusion that the Department lacks authority to set a salary level, it may be reversed on the ground that the legal ruling was erroneous. As a result, by requesting that the Fifth Circuit not address the validity of the salary level set by the 2016 rule, should the Court reverse the preliminary injunction without ruling on the salary level’s validity, it is unclear whether the 2016 rule will immediately go into effect pending new rulemaking. Employers need to stay tuned.

When an employer pays the minimum wage (or more) instead of taking the tip credit, who owns any tips – the employer or the employee? In Marlow v. The New Food Guy, Inc., No. 16-1134 (10th Cir. June 30, 2017), the United States Court of Appeals for the Tenth Circuit held they belong to the employer, who presumably can then either keep them or distribute them in whole or part to employees as it sees fit. This directly conflicts with the Ninth Circuit’s decision last year in Oregon Restaurant and Lodging Ass’n v. Perez, 816 F.3d 1080, 1086-89 (9th Cir. 2016), pet for cert. filed, No. 16-920 (Jan. 19, 2017) and likely sets up a showdown this fall in the U.S. Supreme Court.

The plaintiff in Marlow, who was paid $12 per hour, alleged her employer was obligated to turn over to her a share of all tips paid by catering customers. The Tenth Circuit first held that the statutory language of 29 U.S.C. §203(m), which allows employers the option of paying a reduced hourly wage of $2.13 so long as employees receive enough tips to bring them to the current federal minimum of $7.25, does not apply when the employer pays the full minimum wage, and thus the plaintiff had no claim to any tips. In this regard the Court followed the 2010 decision in Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010), as well as a number of cited district court cases.

Crucially, the Court went on to hold that the U.S. Department of Labor (DOL) had no authority to promulgate its post-Woody Woo regulation, 76 Fed. Reg. 18,855 (April 5, 2011), amending 29 C.F.R. §531.52, which, contrary to Woody Woo, states that tips are the property of the employee whether or not the employer takes the tip credit under section 2013(m). In so doing, it held that although agencies may promulgate rules to fill “ambiguities” or “gaps” in statutes, they cannot regulate when there is no ambiguity or gap that the agency was authorized to fill. It then found (1) there were no “ambiguities” in the statute that needed to be filled, as the statute clearly only applied when an employer sought to use the tip credit; (2) there were no undefined terms in the statute; and (3) there was no statutory directive to regulate the ownership of tips when the employer is not taking the tip credit. In so doing, the Tenth Circuit expressly rejected the Ninth Circuit’s decision last year in Oregon Restaurant, which held that the DOL had the discretion to issue the regulation precisely because the statute was silent on the subject.

Notably, the Supreme Court has four times extended the time for DOL to file its opposition to the petition for certiorari in Oregon Restaurant, most recently on June 30 granting an extension until September 8, 2017. It appears the current DOL may not yet be not sure what position to take as to the validity of its Obama-era regulation. Marlow’s direct conflict with Oregon Restaurant increases the likelihood that either DOL may choose not to defend the regulation or that the Supreme Court will grant review to resolve the conflict when it returns in October.

Not all new laws go into effect on the first of the year. On July 1, 2017, new minimum wage laws went into effect in several locales in California. Specifically:

  • Emeryville: $15.20/hour for businesses with 56 or more employees; $14/hour for businesses with 55 or fewer employees.
  • City of Los Angeles: $12/hour for employers with 26 or more employees; $10.50 an hour for employers with 25 or fewer employees.
  • Los Angeles County (unincorporated areas only): $12/hour for employers with 26 or more employees; $10.50 an hour for employers with 25 or fewer employees.
  • Malibu: $12/hour for employers with 26 or more employees; $10.50 an hour for employers with 25 or fewer employees.
  • Milpitas: $11 an hour.
  • Pasadena: $12/hour for employers with 26 or more employees; $10.50 an hour for employers with 25 or fewer employees.
  • San Francisco: $14 an hour.
  • San Jose: $12 an hour.
  • San Leandro: $12 an hour.
  • Santa Monica: $12/hour for employers with 26 or more employees; $10.50 an hour for employers with 25 or fewer employees.

Of course, employers with employees in these locales will want to ensure that they are complying with these new minimum wage laws.

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.