(October 20, 2016) In the past decade, employers have explored numerous ways to trim the number of employees on staff. While much of the trimming has been necessary due to automation and productivity gains, some of it has been driven by the desire to avoid statutory mandates that are triggered by certain thresholds such as the Americans with Disabilities Act (if employing more than 15 employees) or the Family Medical Leave Act and the Affordable Care Act (if employing more than 50 employees). Still other reductions have been completed to avoid unionization of the work force and payroll taxes, unemployment insurance, overtime, minimum wage, workers’ compensation and other expenses related to payroll. Finally, employers have wanted to place the burden of citizenship screening on third parties. So, how have employers cut the number of employees while maintaining production? The most common approaches to downsizing the employees on staff have been to classify workers as independent contractors or to utilize staffing agencies for personnel needs.

However, recent actions by multiple Federal Agencies including the EEOC, DOL and NLRB make it clear that those employers need to rent a bigger banquet hall for the next employee party as many within this newly created non-employee workforce will be treated as employees regardless of whether they were hired as an employee.

A brief look at the standards

In late 2015, the NLRB re-examined its long-standing joint-employer standard in Browning-Ferris Industries of California, Inc. and determined that Browning-Ferris was a joint employer with Leadpoint Business Services, a staffing agency, for purposes of a union election. In a decision that the EEOC said in September 2016 should be affirmed as consistent with its own approach regarding joint employment, the NLRB held that the old standard allowed too many employers to avoid their obligations to employees under the act. The restated standard allows the finding that two or more statutory employers are joint employers of the same employees if they “share or codetermine those matters governing the essential terms and conditions of employment,” which have been found to include matters such as wages, hours, scheduling, seniority, overtime, number of workers supplied, hiring, firing, discipline, supervision, and direction of the work force.  In determining whether the targeted employer meets this standard, the agencies first look at whether there is a common law employment relationship with the employees in question. Under this new standard, a common law employment relationship exists where an individual is employed to perform services for another and is subject to that other’s control with respect to how those services are rendered whether or not that control is indirect or not even exercised. If the common law relationship exists, the inquiry turns to whether the targeted employer possesses sufficient control over the employees’ essential terms and conditions of employment as discussed above to permit meaningful collective bargaining. If both tests are met, bingo! All those individuals retained through a staffing agency are considered employees of the company to which they have been assigned.

The same fate may also await those that use the independent contractor/subcontractor route in an effort to avoid unionization, payroll costs, regulatory compliance etc. The DOL looks at the economic realities of the work relationship in considering whether an individual is an employee or a contractor. The factors examined, none of which are entirely dispositive, were listed in the Department’s Interpretation issued in mid-2015. Included are: Is the work performed an integral part of the employer’s business? Does the worker’s managerial skill affect his or her opportunity for profit or loss? How does the worker’s relative investment compare to the employer’s investment? Does the worker perform tasks that require special skill and initiative? Is the worker’s relationship with the employer permanent or indefinite? What is the employer’s nature and degree of control over the worker? Notably, the DOL uses this same economic realities test to determine if individuals placed through a staffing agency are employees of the entity at which they are placed. More notably, the DOL starts the analysis with the premise that most individuals are employees and the burden is on the employer to show otherwise.

The consequences of getting it wrong

So, what happens if an employer ends up with unintended employees under the tests discussed above? A lot! The newly minted employees may have claims for, among other things:

  • Fair Labor Standards Violations for Underpayment of Wages or Overtime
  • Workers’ Compensation
  • Unemployment Compensation
  • Family Medical Leave Act Violations
  • Americans With Disabilities Act Violations
  • Affordable Care Act Violations
  • Immigration Violations
  • Discrimination in the Workplace
  • Retaliation
  • Unfair Labor Practices

Many of these claims for violations of the various statutes involve liquidated damages of twice the amount of any underpayment plus civil penalties and attorney fees. The cost of getting the employment relationship wrong is much more than a couple of extra plates at the end of the year party. Depending on the size of the work force it could be in the hundreds of thousands of dollars.

The Human Resource and Employment Law Team at Rhoades McKee can assist employers in determining if and how they can trim the ranks of their employees without inadvertently ending up with employees they never hired.

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