(Adds AFL-CIO comment, paragraphs 9-10)
June 7 (Reuters) - The U.S. Labor Department on Wednesday said it was rescinding the Obama administration's standard for determining when companies are "joint employers" of contract and franchise workers, in the agency's first major shift in labor policy under President Donald Trump.
The department in a statement said it had withdrawn a 2016 interpretation of the federal Fair Labor Standards Act (FLSA) that expanded the circumstances under which a business could be held liable for wage-law violations by staffing agencies, contractors, and franchisees.
Previously, companies were considered joint employers when they hired and fired workers and set wages. The Obama administration said a worker's level of "economic dependence" on a company should also be considered.
The expanded definition of joint employment had rankled the business community, which said it threatened the franchise business model and would draw companies into lawsuits when they were not responsible for setting working conditions.
Also on Wednesday, the department withdrew 2015 guidance that said that under the same law, many workers are improperly treated as independent contractors when they are actually employees, which would make them eligible for minimum wage, overtime, and other legal protections.
Guidance issued by federal agencies is not legally binding, but serves as a blueprint for how agencies will enforce federal laws. A shift in enforcement priorities at the Department of Labor had been widely expected since President Donald Trump, a Republican and wealthy businessman from New York, took office.
Business groups have said the department's guidance on employment and worker classification was misguided and affected nearly every U.S. industry, and they praised the agency's changes on Wednesday.
"Diligent employers work hard to be compliant with the FLSA and these (department) interpretations were merely enforcement traps waiting to spring," Randy Johnson, a vice president at the U.S. Chamber of Commerce, said in a statement.
Unions and workers' rights groups said they were troubled by the labor department's decision.
"This was guidance that made it easier for employers, workers, unions and others to know about their rights and obligations under the law," Lynn Rhinehart, general counsel for the AFL-CIO, said in a statement.
The withdrawal of the guidance does not affect a separate expansion of the definition of joint employment by the National Labor Relations Board, which is under review by a federal appeals court. The NLRB's standard has had more of an impact than the labor department's because it is legally binding and requires joint employers to bargain with unions. (Reporting by Daniel Wiessner in Albany, New York: Editing by Tom Brown and Grant McCool)