An Economic Reality: Uniform Regulatory Definition Needed for Who Is an “Employee”

DOLLast month, the Department of Labor (DOL) announced that its was withdrawing controversial policies that reflected how its Wage and Hour Division defined the terms “employer” and “employee” when enforcing the Fair Labor Standards Act (FLSA). DOL merited the applause its action received from regulated entities, but it is merely one small step in the direction of what franchisors, franchisees, “gig” economy participants, independent contractors, and other businesses desperately need: clear, uniform, and reliable standards that put an end to the “gotcha” game regulators and lawyers have been playing in recent years.

This part will focus here on standards for the term “employee”; a future post will address the need for uniformity in what constitutes an “employer.”

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“Who do you work for?”

The answer to that seemingly basic question is of enormous consequence to America’s economy. A formal employer-employee relationship triggers the application of many federal and state workplace statutes. The resulting legal and regulatory risks and costs employers must bear have been a major factor in the growth of independent contracting. According to a 2015 Pew Research Center report, individuals who consider themselves self-employed, and the employees such people hire, make up one-third of the US workforce. Entire businesses are organized around relationships with independent contractors, and the use of self-employed specialists on a contract basis creates invaluable efficiencies for every imaginable US business sector.

For decades, common-law principles of agency governed how regulatory agencies and courts distinguished between employees and independent contractors in most instances. In the past ten years, state regulators and plaintiffs’ lawyers have methodically worked to broaden the concept of “employee,” advancing an “economic realities” legal test the US Supreme Court created in the 1944 decision NLRB v. Hearst Publications. Regulators and lawyers pursued that approach even though Congress legislatively clarified that the Hearst Publication Court’s amorphous test does not apply under two of the three major New-Deal-era labor laws (more on that below). State regulatory actions and class-action lawsuits alleging worker misclassification proliferated even as federal regulators mostly continued to follow the traditional common-law definition.

Federal restraint ended, and legal uncertainty swelled, with the advent of the Obama Administration. Federal labor regulators embraced the aggressive approach of their state counterparts, spearheaded by DOL officials who viewed the FLSA’s requirements through the economic-realities ultra-wide lens. The agency’s FLSA enforcement had a ripple effect on how other federal laws were applied, and egged on other labor regulators, including the National Labor Relations Board (NLRB), to follow DOL’s lead.

In response to employers’ demands for further guidance, on July 15, 2015, DOL’s Wage and Hour Division issued Administrator’s Interpretation No. 2015-1. The document created a de facto presumption that all workers are “employees” under the FLSA. In response to protests that it was changing the rules without public input, DOL argued that the Administrator’s Interpretation simply restated prevailing legal standards.

The Labor Department’s June 7, 2017 withdrawal of that informal guidance is an encouraging sign that the new administration intends to follow a modified approach on worker classification. But the regulatory standards for “employee” still remain far from clear or uniform.

As mentioned above, in reaction to the Supreme Court’s invention of an economic-realities test for determining who is an “employee” under federal labor laws, Congress amended two New-Deal statutes, the National Labor Relations Act (NLRA) and the Social Security Act, to reinstate the common-law agency test for classifying workers. The Obama-era NLRB, motivated by DOL’s successful crusade against independent contracting, essentially ignored the NLRA’s more restrictive standard of employment when targeting employers. On numerous occasions (see, e.g., a WLF Legal Opinion Letter on Crew One Productions v. NLRB and a WLF blog post on FedEx Home Delivery v. NLRB), federal courts shut down NLRB enforcement actions for exceeding statutory authority.

Congress did not, however, amend the third major New Deal labor law, the Fair Labor Standards Act, which defines “employee” as “any individual employed by an employer.” That circular definition opened the door to broad judicial interpretation, which in turn allowed DOL to utilize an extreme version of the Supreme Court’s economic-realities test.

Congressional action on the FLSA would complete the harmonization of how agencies categorize workers under the major federal labor laws that Congress started over 70 years ago. It would require DOL to utilize the common-law agency test when enforcing the FLSA, while also forestalling future labor regulators’ attempts to reinstate broader standards for defining “employee.”

In addition to explicitly adopting the common-law test, an FLSA amendment would have to include a provision that preempts all substantially similar state, city, and county laws that address worker categorization. Absent federal preemption, some state and local regulators will continue to foment uncertainty over who is an “employee,” and plaintiffs’ lawyers will keep doing the same through class-action litigation.

All stakeholders involved in the regulation of worker categorization would benefit from a harmonized test based on the common law. Government regulators would finally all be on the same page when determining labor laws’ applicability. Employers would gain desperately needed legal predictability, reducing their compliance costs and altering the risk-benefit calculus they undertake when considering independent contractors. And most importantly, clear legal standards would encourage more businesses to hire independent contractors, and inspire the creation of new gig-economy companies organized around the independent-contractor model.

Also published by Forbes.com on WLF’s contributor page.

2 thoughts on “An Economic Reality: Uniform Regulatory Definition Needed for Who Is an “Employee”

  1. Pingback: Another Economic Reality: Single, Rational Test Needed for Who Is an “Employer” – The WLF Legal Pulse

  2. Pingback: Labor and employment roundup - Overlawyered

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