DOL Withdraws Informal Guidance on Joint Employment and Independent Contractor Status

June 7, 2017Alerts Labor & Employment Alert

In a return to pre-Obama standards, the U.S. Department of Labor has withdrawn its 2015 and 2016 informal guidance on joint employment and independent contractors.

The action is significant because, during President Obama's eight years in office, the DOL and its state counterparts increased their efforts to investigate and identify companies that were allegedly improperly classifying individuals as independent contractors.

Investigators from the DOL Wage & Hour Division typically appeared at an employer with limited notice and demanded to see payroll and time card records. More likely than not, the DOL investigator would conclude that all independent contractors retained by the employer had been misclassified, and should have been treated as nonexempt employees who were owed overtime and/or minimum wage.

The DOL did not care if the affected individuals wanted to remain independent contractors. The employer could fight the determination, but on account of a memorandum of understanding between the DOL and the IRS, overtime and minimum wages were just the start of the employer’s problems. Improperly classifying independent contractors could result in penalties and interest on unpaid payroll taxes, and state agencies piling on seeking unpaid unemployment insurance taxes.

The DOL’s increased enforcement efforts led to DOL’s abandoning the “right to control” test in favor of the “economic independence test.” The problem for employers was that the DOL’s new standard was less than clear. Employers were left without clear direction on how to set up independent contractor relationships.

The DOL also loosened the standard for establishing joint employment in those situations where an individual provided services to two or more employers. Prior to the Obama administration’s increased enforcement efforts, the test for joint employment was whether the employer exercised direct control over the individual. During the Obama years, DOL adopted a new standard and found joint employment whenever an employer exercised indirect control over the individual. This shift resulted in joint employment in situations that previously would not have been joint employment.

These two changes culminated in the DOL's 2015 and 2016 informal guidance on joint employment and independent contractors. And it is these two changes that the Trump administration’s DOL has now rescinded. Thus, the DOL is reinstating the direct control test for joint employment (as opposed to the more expansive indirect control standard) and right of control test for independent contractors (instead of the more liberal economic independence test).

Bottom Line: The DOL and its state counterparts still will investigate the classification of workers as independent contractors, and whether one employer can be held liable as a joint employer for another employer's violations. However, the June 7, 2017 announcement of the rollback to the pre-Obama tests for joint employment and independent contractors means that it may now be easier to classify individuals as independent contractors, and it will be more difficult to hold one employer liable for the employment law violations of another employer.