Employer Whiplash: Federal Agencies Flip-Flop on Two Federal Employment Rules
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Employer Whiplash: Federal Agencies Flip-Flop on Two Federal Employment Rules

Brownstein Client Alert, April 18, 2024

While federal regulations and rules shift under new administrations frequently, recent events related to two important employment rules mean they revert to prior versions, potentially exposing employers to legal liability if they don’t adjust their compliance efforts. The new employee classification rule from the Department of Labor (DOL) and a judicial stay of the National Labor Relations Board’s (NLRB) new rule for joint employers will require employers to comply with the prior iterations of these rules.

Below, we summarize each and analyze the impact on employers.

To learn more about classifying independent contractors, attend the upcoming webinar, “The Independent Contractor Question and Why It Matters,” with Brownstein employment Shareholders Kayla Dreyer and Luke Glisan on May 1, 2024. Click here for further details and to register.

The DOL’s New Rule for Determining Whether a Worker Is an Employee or Independent Contractor

On Jan. 9, 2024, the DOL Wage and Hour Division announced its final rule on Employee or Independent Contractor Classification (New Classification Rule) under the Fair Labor Standards Act (FLSA). The New Rule replaces a 2021 rule issued by the Trump administration, which considered five economic reality factors: (1) nature and degree of control over the work, (2) opportunity for profit or loss, (3) amount of skill required, (4) degree of permanence of the working relationship, and (5) whether the work is an integral part of the business, with the first two factors being given greater weight per the DOL—to determine whether an employee is an independent contractor (Prior Classification Rule).

The New Rule takes a totality-of-the-circumstances approach to the question of whether an employee is an independent contractor by considering multiple factors: (1) opportunity for profit or loss, (2) investments by the worker and the potential employer, (3) the degree of permanence of the work relationship, (4) the nature and degree of control, (5) the extent to which the work performed is an integral part of the potential employer’s business, and (6) skill and initiative. The New Rule took effect on March 11, 2024. To learn more about the New Rule, see the previous alert from Brownstein’s employment law and federal government relations teams here.

Notably, more than a year before the DOL announced the New Classification Rule under the FLSA, on June 13, 2023, the NLRB rescinded a Trump-era employer vs. independent contractor classification rule under the National Labor Relations Act (NLRA). The former rule was a more employer-friendly one previously employed under the Obama administration. The NLRB follows the traditional common-law factors of agency relationships for determining whether a worker is an employee or independent contractor under the NLRA. Some of these common-law factors include: (i) the extent of control over the details of the work, (ii) the distinct nature of the worker’s occupation, (iii) degree of director or supervision provided, (iv) the skill required, (v) the instrumentalities and location of the work, and the (vi) method of payment for work by time or by job.

The Stay of the NLRB’s New Joint Employer Rule

On Oct. 27, 2023, the NLRB published a new rule for determining joint-employer status (New Joint-Employer Rule). The New Joint-Employer Rule provides that two or more entities may be considered joint employers under the National Labor Relations Act (NLRA) if: (i) each entity has an employment relationship with the employees and (ii) the entities determine together the essential terms and conditions of one or more of the employees’ employment, regardless of whether such control is exercised indirectly or directly.

The New Joint-Employer Rule replaced the 2020 rule put in place under the Trump administration, which provided that an entity may be considered a joint employer if it possesses and exercises “such substantial direct and immediate control over one or more essential terms or conditions of [] employment as would warrant finding that the entity meaningfully affects matters relating to the employment relationship” (Prior Joint-Employer Rule).

The New Joint-Employer Rule was to go into effect on March 11, 2024. But before it could, it faced significant challenges in the House and in the courts. Following the publication of the New Joint-Employer Rule, the House voted 206-177 in favor of a resolution providing for disapproval of the New Joint-Employer Rule. To learn more about the House’s Vote to Overturn the New Joint-Employer Rule, see a previous alert from Brownstein’s government relations team here. .

Most recently, the United States District Court for the Eastern District of Texas vacated the New Joint-Employer Rule. In Chamber of Com. of United States v. Nat’l Lab. Rels. Bd., No. 6:23-CV-00553, 2024 WL 1203056 (E.D. Tex. Mar. 18, 2024), the federal district court found that the NLRB failed to provide sufficient justification to rescind the Prior Joint-Employer Rule and that the New Joint-Employer Rule was contrary to law because it exceeded the scope of the common law definition of an employer. While this decision could be appealed, or the NLRB could rescind the Prior Joint Employer Rule and issue a new rule, presently, the Prior Joint Employer Rule is the governing one for determining joint-employer status.

Predictably, in July 2021, the Department of Labor (DOL) rescinded a Trump-era rule created in 2020 for determining joint-employer status under the FLSA. The now-rescinded rule created a statutory framework for determining joint employer status in lieu of the various different tests used by federal circuit courts, provided a statutory definition of “employer,” and created two tests for determining “vertical” joint employment and “horizontal” joint employment, the former of which focused largely on whether the potential joint employer actually exercised control over the employee. Despite rescinding the prior rule in 2021, the DOL has yet to issue a new joint-employer rule under the FLSA.

The Effect of the Flip-Flopping Rules on Employers

Both of these recent events revert the independent contractor classification rule and the joint employer rule back to the rules in place in 2020 and 2021, respectively. The changing of administrative rules with new administrations is not new. Nor is it novel that different agencies utilize different rules under the applicable federal laws. But particularly in the employment context, it is critical that employers ensure that their policies stay up to date with the current rules and standards for these issues, which come with significant legal consequences and exposure for noncompliance. An employer’s ability to do so, however, can be thwarted by ever-changing administrative rules and standards coupled with the necessity of harmonizing those administrative rules with other related rules via internal policies (e.g., state-specific employee classification standards not covered under federal law, the IRS’s three-factor test for classifying employees, ERISA standards for determining eligibility of workers for retirement plans, the lack of a rule for joint employer status for purposes of the FLSA following the DOL’s rescission of the Trump-era joint employer rule in 2021, etc.).

Given that these employment rules seem to change with each new administration, employers may be best suited if they can structure their internal policies in a way that satisfies both the prior and current versions of these rules, or at least maximizes the overlap. If you are concerned whether your existing policies comply with these rules or are interested in how your business may be impacted, please reach out to the authors of this alert or any member of Brownstein’s Labor and Employment team.

This document is intended to provide you with general information regarding recent changes in federal employment rules. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.

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