Hot Topics: Worker Classification Issues

Corporate & Securities Update

Client Alert

Worker classification issues are popping up in the news a lot again. This is because the National Labor Relations Board (NLRB) is taking a more aggressive view on joint-employer standards under the National Labor Relations Act, particularly as to how these standards apply in the staffing company and the franchisor-franchisee settings. Recently the Department of Labor (DOL) and the IRS have been aggressively pursuing companies on various fronts for misclassifying workers as independent contractors.

Joint Employment

The issue of joint-employer liability – when one company is tagged with the legal obligations of another company – is not new. Nonunion and union subsidiaries of the same parent company must be careful not to be deemed the same company. Otherwise, the nonunion subsidiary could be found responsible for the labor obligations of the union subsidiary. Sister companies and parent-subsidiary companies in any context must be careful to maintain their independence so as to avoid being brought into the litigation of another company. Staffing companies and their clients must be careful to define employment obligations of each company. In a transaction setting, successor companies should follow all corporate formalities so that, for example, the legal disputes of a buyer are not imputed to its seller.

What are the joint-employer liability rules, and how are they changing? Joint-employer liability rules consist of two separate doctrines, although they often are blurred. The first one is the “single-employer” doctrine. Under this doctrine, two ostensibly separate companies are treated as one. “Double-breasting” analysis – the potential liability of a nonunion subsidiary for a union subsidiary’s labor obligations – usually occurs under the single-employer doctrine. Analysis of the single-employer doctrine usually involves the following four factors: 1) interrelation of operations, 2) common management, 3) common ownership, and 4) centralized control over labor relations. Historically, courts put extra emphasis on the fourth factor.

The second concept, the “joint-employer” doctrine, arises when two different companies have control over the same employee or the same set of employees. This issue can arise when two separate companies are not even related – staffing companies for example. The standards under the joint-employer doctrine are not quite as clear, and the NLRB’s Browning-Ferris decision issued in August 2015 further clouds the issue. In Browning-Ferris, the company’s employees worked outside its recycling plant, and a staffing company’s employees all worked inside the plant. However, all were involved in sorting and preparing trash for recycling. Browning-Ferris, the recycling company, maintained certain hiring standards (mandatory drug tests) for the staffing company, reserved the right to remove employees, and paid the staffing company based upon a markup of hours worked by the staffing company’s workers. Browning-Ferris also controlled methodologies, scheduling, and training. This relationship with the staffing company was clearly different in a lot of ways from a company contracting with a contractor to perform certain work for a fixed price according to the contractor’s expertise. The NLRB found that joint-employer status existed in this case. The NLRB’s position is that a myriad of factors can come into play and not one issue is controlling. However, to oversimplify the analysis, focus remains on control over labor matters, and potential control, not just actual control, may be all that is needed for joint liability.

Independent Contractors

Federal (and state) agencies have begun to focus more on so-called independent contractor relationships. Whether a worker is an employee or an independent contractor is critical in many different situations. What if the worker kills someone? What if he kills himself? What if he burns your building down? What if he brings a class-action employment case against you? What if he demands overtime pay? What if the IRS wants to see his payroll records? Having correctly categorized a worker in anticipation of these possible scenarios can have a huge impact on any company.

Before discussing the various tests and initiatives now taking place, two points are worth making. First, if your worker does not have an employer – a separate contractor or perhaps a legitimate staffing company – then your company automatically is in the danger zone. Certainly sole proprietorships are legal, but they can be dangerous for a company using them, especially if the sole proprietorship is not set up correctly – something you might not even realize. For example, does the sole proprietorship have any kind of insurance? Second, these individual contractors are much smaller than your company. So, if something goes wrong, your company is going to be a target no matter what you think the law is about independent contractors.

There are several independent contractor tests, which is not surprising since the issue comes up in so many different contexts. One of the most well-known is the “Common Law Test,” or the traditional 20-factor test once used by the IRS. The 20-factor test was revised to feature factors organized into three categories, but continues to include an examination of issues such as supervision, training, who sets hours of work, whether payment is by the hour, who furnishes tools and equipment, and the permanency of the relationship. Like in the joint-employer setting discussed above, the key issue is always who has the right of control. Did your company hire this contractor to perform a discreet project which he completes with his own tools and methods and you just pay the bill when the project is completed? Or does he work for you on an annual basis, doing what you tell him to do and doing it the “company way”? To further complicate matters, the Wage and Hour Division of the DOL just issued new guidance this summer for minimum wage and overtime claims which focuses on what is known as the six-factor “economic realities” test. These factors focus less upon the right of control and more upon whether the worker is economically dependent on the company, whether there is actual investment in the enterprise by the worker, and whether the worker has opportunity for profit and loss.

Several different government entities now are developing initiatives to challenge the status of independent contractor arrangements. One, of course, is the IRS. The IRS began its initiative several years ago and now has a Voluntary Classification Settlement Program. Another agency addressing the issue is the NLRB. Below we have compiled a short list of tips for maintaining the proper classification for your workers and independent contracts. If you would like further assistance in the analysis of your own classification of workers, please contact us.

Tips for Maintaining Proper Worker Classification

  1. Keep human resources and payroll functions separate and independent from other companies. Do not put independent contractors “on payroll.”
  2. Maintain separate lines of supervision among companies.
  3. Do not comingle equipment and resources unless all of the exchanges of such are clearly accounted for in some business fashion.
  4. Do not have one company and its C-suite governing the operation of a second company.
  5. Keep brands separate.
  6. Take care of the obvious stuff, such as not using the same telephone number and switchboard for multiple companies.
  7. Use contracts, subcontracts, and consulting contracts to maintain arm’s length business obligations between companies and independent contractors.
  8. Make sure that independent contractors have invested in their business and are not being supported solely by the company.
  9. Maintain confidentiality of trade secrets and bidding information.
  10. Separate union and nonunion workers as far as possible.