You Could Be Liable for Benefits and Overtime Wages if the DOL Determines That You and Your ‘Independent Contractor’ Are Really Joint-Employers

By: Robert W. Small

One of the greatest financial risks Employers face today is the misclassification of their workers. This article deals with two distinct ways employees can be misclassified, each of which can result in disastrous claims for wages, fines, penalties and attorney’s fees.

Independent Contractor vs. Employee

For a host of reasons, Employers are drawn to engaging independent contractors (IC’s) to perform work. IC’s do not participate in Employer benefit plans including, ever more costly, healthcare plans.  IC’s are not entitled to overtime pay but are limited to whatever payment is due under the IC Agreement and must accomplish the work within that compensation structure. Often, the responsibility for safety when performing the work is assigned to the IC.

A subset of misclassification of workers as independent contractors arises under the concept of the “joint-employer.” In Browning-Ferris, the National Labor Relations Board significantly expanded the concept of the joint-employer.  Prior to Browning-Ferris, whether an employee was the joint-employee of two Employers was determined by whether alleged joint-employers share the ability to control or co-determine essential terms and conditions of employment. Years of case law provided guidance to Employers as to what constituted “essential terms and conditions of employment,” which included hiring, firing and the ability to discipline the worker.  Board decisions placed emphasis on the type of control exercised; requiring for joint–employer liability to exist that the control be “direct and immediate.” [See e.g. Airborne Freight Co. 338 NLRB 597 (2002)]

The new standard under Browning-Ferris is that joint-employer status exists if: (i) both entities are employers within the meaning of the common law; and (2) they share or co-determine those matters governing the essential terms and conditions of employment. This new standard has been referred to as the “industrial realities” standard and focuses more on the economic relationship between the two employers. 

In determining whether joint-employer status exists, the Board will consider, among other things, whether an employer exercises sufficient control over the worker’s terms and conditions of employment directly or indirectly through an intermediary or, whether it has reserved the right to do so.  This is a far broader and unclear standard. For example, is a franchisor who asserts that its franchisees may not hire applicants with certain criminal records, or imposes other terms and conditions on its franchisees in the hiring or management of the franchisee’s employees, “indirectly” exerting sufficient control over the employment to be a joint-employer with the franchisee? McDonalds Corporation is facing just such a claim. Is a restaurant worker who works at two different restaurants that are separate legal entities but under common ownership employed by joint employers such that hours worked at both must be considered for overtime pay purposes? (referred to as “horizontal” joint-employment)  Are a temp agency and the employer where a secretary or stock clerk is placed joint employers? (referred to as “vertical” joint-employment) The Federal Department of Labor has established a multi-criteria test for addressing these situations.  

Where there has been a misclassification of an employee in this regard, the unsuspecting “joint-employer” faces liability in a variety of forms. That Employer may be subject to suit for acts of unlawful discrimination under federal, state and local laws and ordinances, violations of the Fair Labor Standards Act (FLSA; see discussion below), the National Labor Relations Act, the Occupational Safety and Health Act and a host of other employment related laws.

Exempt vs. Non-Exempt Employees

Both State and the Federal Departments of Labor, along with plaintiff attorneys, have turned up the heat on how employers classify their employees for wage and hour purposes.  Typically, the issue is whether Employers have correctly classified their employees as Exempt (from overtime requirements of the FLSA) or “Non-exempt.”  

A complete discussion of wage and hour rules is beyond the scope of this article, but one common error is when employers believe that if they pay an employee a salary the employee is Exempt and no overtime pay is required. This is not the case. There are three aspects to the “salary” exemption, each of which must be satisfied. 

• First, the employee must be paid a salary of at least $455 per week. (The Federal Department of Labor proposes to raise this amount to $921 per week this year.)  
• Secondly, the salary must be guaranteed for every week in which work is performed regardless of the hours worked. 
• Third, and this is the test often missed by employers, the duties of the position must be those deemed by the Federal Department of Labor of being at a high level. This includes executive duties, exempt professional duties such as those of lawyers, doctors, teachers and registered nurses and exempt administrative duties. 

This last mentioned category of exempt duties is the one Employers most often use in making misclassification decisions. Exempt administrative duties are high-level duties that are required to “keep the business running.” They generally are in the operational end of the business rather than the production end.

What’s An Employer to Do?

The costs of misclassifying workers either in failing to recognize joint-employer liability or in not correctly classifying an employee as non-exempt for wage and hour purposes are potentially great. As noted, a joint-employer can be held liable for OSHA violations or violations of anti-discrimination laws. Employers should not assume that their misclassification will not come to light. It takes only one disgruntled employee to file a wage and hour claim or employment discrimination lawsuit for an employer to become embroiled in class action litigation that risks the imposition of enormous damages and legal fees.

Employers should conduct employment audits to be sure that their contracts with independent contractors and temp agencies, and the manner in which the work is actually supervised and controlled, do not create an unintended joint-employer relationship and that employees are properly classified under the FLSA. These audits should include legal counsel familiar with the state of the law on such matters.

For questions, comments or additional information, please contact Robert Small, Partner in our Employment Practice Group, at rsmall@regerlaw.com or via phone at 215.495.6541.