Worker Misclassification Is in Agencies’ Crosshairs

Allen Smith, J.D. By Allen Smith, J.D. January 24, 2022
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​Federal enforcement agencies are coordinating enforcement efforts to go after employers that misclassify workers as independent contractors, so employers need to keep their independent contractors at arm's length.

On Jan. 6, the U.S. Department of Labor's Wage and Hour Division and the National Labor Relations Board (NLRB) announced that they had agreed to collaborate to improve enforcement of the laws administered by each agency, noted Thomas Stanek, an attorney with Ogletree Deakins in Phoenix. The Wage and Hour Division enforces the Fair Labor Standards Act (FLSA) and Family and Medical Leave Act. The NLRB administers the National Labor Relations Act (NLRA).

"This is a coordinated leap by the administration to not only more aggressively enforce the FLSA and NLRA, but to pursue each agency's effort to expand the scope of who's a joint employer and narrow the scope of who's an independent contractor," said Rob Boonin, an attorney with Dykema in Ann Arbor, Mich.

'Fissured Employment'

The memorandum of understanding between the two agencies targets "fissured employment."

This term was coined by David Weil, President Joe Biden's nominee to head the Wage and Hour Division and a former administrator of the division during the Obama administration, Stanek said.

"Weil asserts that the fissured workplace results from businesses shedding noncore activities to other entities—for example, janitorial, facilities maintenance, security—while still maintaining tight control over these activities through high standards, monitoring and other mechanisms of enforcement," Stanek said. "This theory reflects Weil's previous position in favor of a broad test for joint employer status and a narrow test for independent contractor status."

Neither the FLSA nor the NLRA uses the term "fissured employment," said Peter Spanos, an attorney with Taylor English Duma in Atlanta. In the context of the agreement between the Wage and Hour Division and the NLRB, "the expression refers to business structures that are not the simple model of one company employing a workforce of its employees."

He added that the use of the word fissured "implies that the simple model has been split, fractured or broken by employers and that the simple model should be restored." Use of independent contractors is an example of a fissured employment structure. Other examples include different types of employers that the DOL might seek to interpret as joint employers, such as union and nonunion companies under common ownership, complex corporate parent and subsidiary organizations, and franchisors and franchisees.

"Regardless of the term chosen to describe them, fissured employment structures as such are not unlawful under any federal employment law or regulation," Spanos noted.

Review Operations

Nonetheless, Spanos said, organizations consisting of multiple corporate entities and franchises should review their operations to verify that:

  • Actual control of terms and conditions of employment is exercised only within the relevant entity or franchisee.
  • Interrelated operations are handled at arm's length.
  • Employment and labor relations decisions are made independently for each entity.

"Otherwise, joint employer status could result," he cautioned. The agreement between the Wage and Hour Division and the NLRB "reflects the current administration's view that interrelated or commonly owned entities should be jointly responsible for compliance with labor and employment laws," Spanos said.

Expect greater scrutiny by both the Wage and Hour Division and the NLRB of independent contractor arrangements, he said. "Most employers should avoid having individual independent contractors provide the primary services or products of the employer. All employers should avoid excessive control of independent contractors, avoid independent contractors who are economically dependent upon the company and ensure that independent contractors have an opportunity for profit," Spanos stated.

Keep in mind that the NLRB recently announced it is seeking briefs to potentially change the independent contractor standard, added David Pryzbylski, an attorney with Barnes & Thornburg in Indianapolis.

More Charges

Employers can expect more charges filed against them if claims are before the Wage and Hour Division or the NLRB as a result of the agreement between the two agencies, Pryzbylski said.

For example, an employer involved in an NLRB charge and investigation should expect that a potential wage and hour violation discovered by the NLRB will be explained to the charging party and end up in front of the Wage and Hour Division for investigation, he said.

An example could be an employee filing an NLRB charge alleging the company unlawfully restricted discussion of the worker's wage rate. If during the investigation the NLRB learned that the employer was failing to properly pay overtime, the agency could refer the employee to the DOL as well, even if the worker originally had no intention or thought of doing so, Pryzbylski noted.

Another example, Boonin said, would be hotels that contract out food service or housekeeping duties. The Biden administration wants "to have all of these employers count as one, with the hope that the government can just hold the employer at the top of the structure liable for all wrongs committed by those below."

A union's unfair-labor-practice charge filed with the NLRB against an employer for not bargaining over terms and conditions of employment for workers who the employer considers independent contractors could lead to a companion investigation of the status of the workers by the DOL, Spanos said.

If the Wage and Hour Division comes across unfair labor practices, it could share information and engage in joint investigations with the NLRB, Stanek said. Expect an uptick in unfair-labor-practice charges to be mostly from nonunionized employees educated about the NLRB's jurisdiction, but there could be an increase in unfair labor practice charges against unionized employers as well, he noted.

"Routine wage-hour audits, employee complaints, and alleged minimum wage or overtime violations are likely to take on broader significance, and with that greater exposure to damage awards and penalties," said Kathleen Caminiti and Alba Aviles, attorneys with Fisher Phillips in Murray Hill, N.J., in an e-mail.

As Boonin put it, "The attack on who's an independent contractor will be on two fronts."

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