On July 29, 2021, the United States Department of Labor (“DOL”) announced that it would rescind the Trump-era rule (the “Joint Employer Rule”) pertaining to the determination of joint employers for purposes of assigning liability for wage and hour violations under the Fair Labor Standards Act (“FLSA”). The Joint Employer Rule, which took effect on March 16, 2020, was intended to clarify the definition of who may be held jointly liable as an employer under the FLSA by emphasizing whether someone:
- Hires or fires the employee;
- Supervises and controls the employee's work schedule or conditions of employment to a substantial degree;
- Determines the employee's rate and method of payment; and
- Maintains the employee's employment records.
By de-emphasizing these four factors, effective September 28, 2021, the DOL broadens the scope of who could be potentially liable as a joint employer for wage and hour violations, such as minimum and overtime wage issues. Following the rescission, it is now much more likely that utilizing independent contractors and/or hiring another business to provide services, such as janitorial and/or payroll services, could result in liability for wage and hour violations as a joint employer.
Furthermore, this rescission follows a series of other reversals made by the Biden-era DOL following the 2020 election, signaling the agency is likely to take a much tougher stance on wage and hour enforcement actions. (Click here for our earlier discussion of the DOL’s prior withdrawal of Trump-era rules that were set to take effect on May 7, 2021, and which were intended to loosen the test for classifying workers as independent contractors).
Ultimately, however, businesses, especially those who regularly engage independent contractors and/or other businesses to provide services, should also stay up to date on state laws regarding these issues, as applicable state law may be much stricter than federal law on this subject matter. For example, California and Massachusetts adopted the following three-part ABC test for determining whether workers are independent contractors or employees in the wage and hour context:
A. That the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact, and
B. That the worker performs work that is outside the usual course of the hiring entity’s business, and
C. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
(Click here for an in-depth discussion of the ABC test in California.) Other states have also adopted this test in at least some contexts, such as unemployment insurance, while utilizing another test for the purposes of wage and hour laws (including minimum and overtime wage calculations). These changes and many other recent changes in California law have been sudden and retroactive, and hiring entities in other states may face similarly abrupt and expensive changes in their business operations as well. Therefore, hiring entities should continue to actively monitor the changing bodies of employment law in each of the states in which they operate, as well as changes at the federal level.
This is particularly the case in California, where employers with potential violations of the ABC test could be subject to significant penalties, in addition to unpaid taxes, unemployment benefits, meal and rest period premiums, and unpaid wage claims by state and local governments as well as private parties brought in class and representative capacities.