DOL Issues New Interpretation of Joint-Employer Relationships

2016 has started in exciting fashion with the Department of Labor (DOL) issuing guidance as to how they are going to continue to address joint-employer issues. As you may have guessed, it is not entirely favorable to employers.

What did we discover with the new interpretation? Some of what we already knew and some of what we anticipated would continue to be the case. Most importantly, the government has placed larger contractors and end-user consumers of temporary employees and independent contractors that they are going to be potentially liable for the misdeeds of the staffing agency or sub-contractor. The DOL will apply an economic realities test to the situation (see below), but the upshot is that many of these co-employment relationships where employer groups share employees and vertical employment relationships where employers hire out sub-contractors or staffing agency employees are going to be liable for overtime, minimum wage, and other Fair Labor Standards Act (FLSA) violations along with the other co-employers, subcontractors and staffing agencies. In sum, there is a decreasing ability for employers sharing employees or hiring temporary workers to barricade themselves against legal liability for such wage and hour claims. Add to what we are seeing under the National Labor Relations Act (NLRA) and the DOL’s guidance in July 2015 on the narrow use of independent contractors and it may behoove employers to reexamine their process and potential exposure to liability in hiring subcontractors, independent contractors and temporary staffing agency employees.

As to the DOL’s economic realities test, the agency will examine these six factors, no one of which is more important to the analysis than the other. The following is from the DOL’s website, explaining how it approaches this test:

1. The extent to which the work performed is an integral part of the employer’s business. If the work performed by a worker is integral to the employer’s business, it is more likely that the worker is economically dependent on the employer and less likely that the worker is in business for himself or herself. For example, work is integral to the employer’s business if it is a part of its production process or if it is a service that the employer is in business to provide.

2. Whether the worker’s managerial skills affect his or her opportunity for profit and loss. Managerial skill may be indicated by the hiring and supervision of workers or by investment in equipment. Analysis of this factor should focus on whether the worker exercises managerial skills and, if so, whether those skills affect that worker’s opportunity for both profit and loss.

3. The relative investments in facilities and equipment by the worker and the employer. The worker must make some investment compared to the employer’s investment (and bear some risk for a loss) in order for there to be an indication that he/she is an independent contractor in business for himself or herself. A worker’s investment in tools and equipment to perform the work does not necessarily indicate independent contractor status, because such tools and equipment may simply be required to perform the work for the employer. If a worker’s business investment compares favorably enough to the employer’s that they appear to be sharing risk of loss, this factor indicates that the worker may be an independent contractor.

4. The worker’s skill and initiative. Both employees and independent contractors may be skilled workers. To indicate possible independent contractor status, the worker’s skills should demonstrate that he or she exercises independent business judgment. Further, the fact that a worker is in open market competition with others would suggest independent contractor status. For example, specialized skills possessed by carpenters, construction workers, and electricians are not themselves indicative of independent contractor status; rather, it is whether these workers take initiative to operate as independent businesses, as opposed to being economically dependent, that suggests independent contractor status.

5. The permanency of the worker’s relationship with the employer. Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee, as opposed to an independent contractor. However, a worker’s lack of a permanent relationship with the employer does not necessarily suggest independent contractor status because the impermanent relationship may be due to industry-specific factors, or the fact that an employer routinely uses staffing agencies.

6. The nature and degree of control by the employer. Analysis of this factor includes who sets pay amounts and work hours and who determines how the work is performed, as well as whether the worker is free to work for others and hire helpers. An independent contractor generally works free from control by the employer (or anyone else, including the employer’s clients). This is a complex factor that warrants careful review because both employees and independent contractors can have work situations that include minimal control by the employer. However, this factor does not hold any greater weight than the other factors. For example, a worker’s control of his or her own work hours is not necessarily indicative of independent contractor status; instead, the worker must control meaningful aspects of the working relationship. Further, the mere fact that a worker works from home or offsite is not indicative of independent contractor status because the employer may exercise substantial control over the working relationship even if it exercises less day-to-day control over the employee’s work at the remote work site.

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