The US Department of Labour (DOL) has withdrawn rules on classification of workers based on ‘economic reality’, which were originally intended to revise the test for classifying workers as independent contractors at the federal level for wage and hour purposes under the Fair Labour Standards Act (FLSA).

Under some circumstances, an employee of one company may be a joint employee of a second company, depending on the extent of control and supervision that one employer exercises over the employee. If the second company is a joint employer, both companies might be liable for minimum wages and overtime pay under the FLSA.

In January 2020, the Department published a final rule titled “Joint Employer Status Under the Fair Labour Standards Act,” which became effective on 16 March 2020 (Joint Employer Rule, or Rule) and was intended to clarify the definition of who may be held jointly liable as an employer under the FLSA.

The Rule contained standards for both “vertical” joint employment, in which an employee works for only one employer but depends on another business entity with respect to their work, and “horizontal” joint employment, in which an employee is employed by more than one distinct employer. 

The Rule, which never took effect, would have largely maintained the ‘economic realities’ test to determine whether a worker is in business for himself/herself (an independent contractor) or is economically dependent on the employer for work (an employee) for purposes of the FLSA by considering the following factors:

• The extent to which the services rendered are an integral part of the principal’s business.
• The permanency of the relationship.
• The amount of the worker’s investment in facilities and equipment.
• The nature and degree of control by the principal.
• The worker’s opportunities for profit and loss.
• The amount of initiative, judgment, or foresight in open market competition with others required for the success of the worker.
• The degree of independent business organisation and operation.

On 12 March 2021, the Department issued a Notice of Proposed Rulemaking (NPRM) proposing to rescind the Joint Employer Rule.

After reviewing the comments submitted in response to the NPRM, the Department has decided to finalise the rescission of the Joint Employer Rule. The Department believes that the 2020 Rule is inconsistent with the FLSA’s text and purpose. 

Effective 28 September 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.

It will become much more likely that utilising 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.

Many commenters, including the Society for Human Resource Management (SHRM), argued that this rescission will lead to confusion and uncertainty. As a result, employers are grappling with a patchwork of various court decisions for guidance as to the existence of joint employment status.

Moreover, companies 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.