Garbage Bird? Don’t Get Poisoned By A Double Hit of Misclassification and Joint Employment

Photo: Benjamin Freeman/Wikimedia Commons (CC BY 4.0)

The natives of Papua New Guinea call the hooded pitohui a “garbage bird,” and they don’t eat it or touch it. As Westerners learned more recently, there’s a good reason for the islanders’ hostility.

The hooded pitohui is the first bird confirmed to be poisonous. The bird‘s feathers emit batrachotoxins, which causes numbness and burning in low concentrations. A heavier does can cause paralysis, cardiac arrest and death. In other words, there’s good reason for keeping the hooded pitohui off the menu.

Numbness and burning may also describe the impact of a recent DOL enforcement action on two contractors in Louisiana. They were dealt a double hit—the DOL found independent contractor misclassification and joint employment.

After an investigation, the DOL’s Wage and Hour Division found that hundreds of painters and drywall workers had been misclassified as independent contractors. The company that retained the workers, PL Construction, failed to pay overtime and failed to maintain accurate time records, both violations of the Fair Labor Standards Act (FLSA).

Adding to the pain, the DOL found that a higher tier contractor, Lanehart, was the workers’ joint employer. That meant Lanehart was jointly liable for the violations—even though it had no control over PL Construction’s pay practices.

The DOL recovered more than $240,000 in overtime back wages for 306 workers.

There are several lessons here, both for companies that retain independent contractors directly and for higher tier contractors that engage subcontractors that use ICs.

1. The DOL considers independent contractor misclassification an enforcement priority. The agency is actively looking for violations.

2. The DOL publishes its wins. That means you can expect a press release naming and shaming your company if the DOL finds that there’s a practice of misclassifying workers. Have you heard the old adage that there’s no such thing as bad publicity? It’s not true.

3. Higher tier contractors are taking a risk if they put their head in the sand and disregard misclassification by their lower tier subs—especially if they plan to direct the work of the lower tier sub’s workers.

Here, the DOL found that Lanehart, the higher tier contractor, supervised PL’s workers and maintained records of who worked when. Lanehart’s supervision and direction made it a joint employer of PL’s workers. Under the FLSA, a joint employer is fully liable for wage and hour violations, even where it had no control over how the lower tier sub paid its workers.

4. A lawsuit is not the only way misclassification claims arise. Federal and state agencies can initiate investigations too. And while arbitration agreements with class action waivers can prevent class action litigation, they can’t stop a federal agency from pursuing claims on its own.

The DOL made its position pretty clear in its press release: “Our investigation shows the costly consequences employers face when they or their subcontractors fail to comply with the law. When we determine a joint employment relationship exists, the Wage and Hour Division will hold all responsible employers accountable for the violations.”

Misclassification hurts. Joint employment doubles the pain. The DOL can inflict an uncomfortable burning sensation, even without sending a a hooded pitohui your way.

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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Inedible Food: DOL Starts New Rulemaking Process to Toughen FLSA Independent Contractor Test

I saw this truck while driving home last week from my daughter’s college graduation. Now I’m no livestock dietician (I failed that course in law school), but this seems like the worst possible thing to feed your animals.

Whoever’s behind the labeling also needs some help with marketing. I know I wouldn’t buy that.

I’m also not buying the DOL’s recent announcement that it’s holding two public forums to help it decide what to do about a new independent contractor misclassification test. I think we all know what the DOL is going to do already.

The DOL will hold an Employer Forum on June 24, then a Worker Forum on June 29. Anyone can attend. RSVP links are here (6/24) and here (6/29).

After this charade open-minded exchange of viewpoints, the DOL will get to work preparing a new rule for determining who is an employee under the Fair Labor Standards Act (FLSA). The current regulation, issued by the Trump DOL, refocuses the traditional Economic Realities Test inquiry on two core factors: (1) the nature and degree of the individual’s control over the work, and (2) the individual’s opportunity for profit or loss. The Biden DOL tried (unsuccessfully) to prevent the Trump rule from going into effect, but a federal court ruled that the Biden DOL’s attempt to dismantle the rule was flawed, and the Trump rule therefore went into effect.

Now, let’s not kid ourselves. Just because a court told the Biden DOL that it’s stuck with this Trump-made rule doesn’t mean anyone at the DOL is actually applying it. The Biden DOL has said it plans to rewrite the rule, pronto. The new rule will make it harder to classify workers as independent contractors under the FLSA. We already know that’s going to happen, even if we don’t know the precise language to be used.

In late 2022, the DOL will issue its new rule, which will be like the old rule that we had before the Trump DOL’s new rule. Meet the new boss, same as the old boss. And with each new administration, it will become harder then easier then harder to be classified as a contractor under the FLSA.

So I will not be wasting my time listening in on these forums. I expect they’ll be as useful as inedible food. Which cannot be good for the GI tract.

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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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“We Won’t Get Fooled Again”: Senate Rejects Weil (& Join Me Tuesday for a Free Webinar)

(Action shot from the Senate floor!)

Those who have seen me present on independent contractor issues know that I like to incorporate song references by The Who. There are so many song titles and lyrics that help the presentation flow.

On Tuesday, it’s my turn to co-present at the annual BakerHostetler Master Class on Labor Relations and Employment Law. The session is called Answering Tough Questions About Independent Contractors, Joint Employment and the Contingent Workforce, Using Songs by The Who. The session is free, 2-3p ET on April 5. Register here.

If you join me, you’ll get gems like this when we update you on 2022 developments, such as David Weil’s nomination to serve as Wage and Hour Administrator of the DOL:

Democrats: Meet the new boss, same as the old boss.

Republicans: We won’t get fooled again.

David Weil was the Wage and Hour Administrator in the DOL during the Obama Administration. He published two Administrator’s Interpretations expressing the view that most independent contractors were misclassified and that joint employment should be much easier to establish. He wrote about the problems with the “fissured workforce,” meaning the expansion of non-traditional, non-employee labor. He was not a friend of the business community and especially disliked by the franchising community.

In 2021, Biden nominated him to reclaim that post.

Last week, the Senate voted 53-47 to block the nomination.

In the independent contractor space, it’s been a busy few months for the DOL, and I would imagine the administration would like to fill this role as quickly as possible.

Last month, a federal court took issue with the Biden DOL changing its tune on the Trump DOL’s test for independent contractor misclassification. The court declared The Song Is Over and rejected the Biden DOL’s change, reinstating the Trump-era test for worker classification under the Fair Labor Standards Act (FLSA). More details here.

In January, the DOL and the NLRB signed a Memorandum of Understanding in which they agreed to share information to combat independent contractor misclassification.

Join me and my colleagues Margaret Rosenthal and Vartan Madoyan on Tuesday for more updates, tips, previews, and Who-themed lyrics. There’s no charge to attend. I’m Free.

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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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It’s There, Even If You Can’t See It: Court Reinstates Trump-Era Independent Contractor Test, and It’s Effective Now.

There’s an optical illusion known as a negative afterimage. If you stare at the red dot on this woman’s nose for about 15 seconds, then look at a blank wall, you’ll see the woman on your wall – but in full color and with dark hair. And yet, there is no woman on your wall. 

You see what isn’t there because the illusion tricks the photoreceptors in your retina.

Monday’s ruling by a federal judge in Texas also has us seeing what isn’t there – or what was there and then wasn’t there – or something like that, but with respect to the test for independent contractor classification. 

In early January 2021, the Trump DOL issued a new regulation that sought to provide clarity on how to determine whether someone is an employee or an independent contractor under the Fair Labor Standards Act (FLSA). Even though the FLSA is a federal law that is supposed to apply everywhere, different courts around the country used different versions of the FLSA’s Economic Realities Test to make that determination.

Under the new regulation, 29 CFR Part 795, there would be just one test. It was simple, and the same rule would apply all over the country. The regulation was scheduled to take effect March 8, 2021. But a few days before the effective date, the Biden Administration postponed implementation of the new rule. Then in May, they rescinded it. They replaced it with nothing. If you go to the Code of Federal Regulations, there is no 29 CFR Part 795. (Here, try it!)

But Monday’s ruling said to stare a little harder. It’s there.

The court ruled that the Biden Administration’s effort to delay and then withdraw Part 795 was unlawful and violated the Administrative Procedure Act. The delay provided too short a comment period, failing to offer the public a meaningful period to provide input. The withdrawal was improper because the DOL failed to consider alternatives and instead “left regulated parties without consistent guidance.” 

Because the delay and withdrawal of the Trump era rule were deemed unlawful, the court ruled that Part 795 did, in fact, go into effect March 8, 2021, and “remains in effect.”

Who knew?

So now you probably want to know what the rule is, since you cannot find it online in the Code of Federal Regulations – at least as of Tuesday night.

The test in Part 795 identifies two “core factors” for determining the independent contractor vs. employee question under the FLSA. If both factors point in the same direction, the issue is generally decided. If the core factors point in different directions, three “other factors” are considered.

The Two Core Factors

As we explained here, The core factors are:

• The nature and degree of the individual’s control over the work; and

• The individual’s opportunity for profit or loss.

The control factor supports independent contractor status if the worker “exercises substantial control over key aspects of the work,” including setting schedules, selecting projects, and being allowed to work for others.

The profit or loss factor weighs in favor of independent contractor status if the worker has the opportunity to earn profits or incur losses based on the exercise of initiative, managerial skill, business acumen or judgment, or based on management of his or her own investments or capital expenditures. Examples of investments may include hiring helpers or buying equipment. 

Other Factors

If the two core factors do not determine the issue, three other factors are to be considered:

• Amount of skill required for the work;

• Degree of permanence of the working relationship between the individual and the potential employer; and

• Whether the work is part of an integrated unit of production.

Amount of skill required. This factor weighs in favor of independent contractor status if the work requires specialized skill or training that the potential employer does not provide.

Degree of permanence. This factor weighs in favor of independent contractor status if the work is definite in duration or sporadic. This factor supports employee status if the work is indefinite. Work that is seasonal by nature does not weigh in favor of independent contractor status, even though it’s definite in duration.

Whether the work is part of an integrated unit of production. This factor is likely to receive the heaviest criticism from worker advocates. The “integrated unit of production” factor comes from a pair of 1947 U.S. Supreme Court cases. Over the years, this factor has morphed into the question of whether the work is “integral” to the potential employer’s business. Part 795 takes a firm stance here, saying that — based on the 1947 Supreme Court decisions — the relevant question is whether the work is “integrated,” not whether it is “integral.”

This factor weighs in favor of independent contractor status if the work is “segregable” from the potential employer’s processes for a good or service. For example, a production line is an integrated process for creating a good. A software development program may require an integrated process for creating a computer program. Work that is performed outside of an integrated unit of production is more likely performed by an independent contractor.

What Happens Now?

First, the DOL can appeal the decision to the Fifth Circuit. We expect that will happen. In the meantime, a stay might be issued or might not be issued.

Second, Part 795 is now in effect, unless a stay is issued. 

Third, it’s a fair question how much this really matters anyway. The test was not intended to change the outcome in most instances. It was instead intended to articulate more clearly how these determinations were already being made. The two “core factors” were already determinative in almost all cases, even if courts were not explicitly identifying two factors as being most important. Also, the Circuit Courts of Appeal do not have to adopt the DOL’s interpretation of the test. They can go on using their five-part and six-part tests, or they can apply the Part 795 analysis. 

The Part 795 should now be the applicable test. But we shall see.

If you stare hard enough at your handy copy of the Code of Federal Regulations, and then look at a blank wall, Part 795 just might appear.

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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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That’ll Cost You 96 Camels: Court Headlocks Staffing Agency with $7.2M Misclassification Judgment

Mom feeding a non-wrestling camel, May 2010

If you weren’t in Turkey last month, you missed the annual Selçuk Efes Camel Wrestling Festival, which featured 162 competitors in four categories.

The camels are paired by weight and skill, and their techniques include tripping their opponents with foot tricks or applying headlocks then sitting on their opponents. Some just push until the other camel gives up. A winner is declared when one camel scares away the other, making him scream or collapse. The camels are muzzled so there is no biting.

Among those missing the spectacle were the owners of Steadfast Medical Staffing, a Virginia-based firm that maintains a database of nurses and pairs them with healthcare facilities. That’s because they were in federal court, defending against a lawsuit by the Department of Labor. The DOL alleged that they had misclassified the nurses as independent contractors in violation of the Fair Labor Standards Act (FLSA).

After a bench trial, the judge agreed with the DOL and ruled that the nurses — which included CNAs, LPNs and RNs — were employees of the staffing agency. The Court applied the Economic Realities Test, which is the proper test for determining who is an employee under the FLSA.

The Court considered all relevant factors, then applied camel-style headlocks while sitting on the defendant, causing the staffing agency to either scream or collapse (unclear from the opinion). The Court ruled that the staffing agency failed to pay overtime and failed to comply with FLSA record keeping requirements. The agency will be liable for approximately $3.6M in back wages plus another $3.6M in liquidated damages.

Following the judgment, the DOL issued a statement with quotes from the Secretary of Labor, Marty Walsh, and the Solicitor of Labor, Seema Nanda, that the DOL was sending an “unequivocal message” to Steadfast and other staffing companies that the DOL is serious about pursing independent contractor misclassification.

Staffing agencies that treat workers as independent contractors are on notice that the DOL is serious about enforcement. Remember, the facts of the relationship determine whether a worker is an employee or an independent contractor, not how the parties choose to characterize the relationship.

More than 1,100 nurses will share in the award, with a healthy-but-to-be-determined amount of fees headed to the plaintiffs’ lawyers.

A prized wrestling camel can be sold for more than a million Turkish lira. That’s about $75,000. Large awards like this for systemic misclassification are not surprising. This one will cost the staffing firm about 96 wrestling camels.

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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Low-Hanging Fruit? DOL and NLRB Join Forces to Fight Misclassification

Much has been written about the phrase low-hanging fruit. The metaphor’s origins are fairly obvious, referring to obtaining quick wins through minimal effort.

But how good is the metaphor? For harvesters, starting with the lowest hanging fruit is not the best strategy. Fruit near the top of a tree is generally riper and ready to eat, due to better sun exposure. Fruit can also be heavy, and harvesters who start at the top of the tree can work their way down as their bags grow heavier. Then there’s this insightful warning from one author’s mother, who cautioned that the blackberries near the bottom of the bush are the ones most likely to have been peed on by an animal.

Pee notwithstanding, the Department of Labor and the NLRB have seized on the low-hanging fruit strategy as a way to go after companies that misclassify independent contractors.

Last month the two agencies signed a Memorandum of Understanding, agreeing to share information and better coordinate investigations when they suspect there have been violations of the law.

While the DOL and NLRB apply different tests to determine Who Is My Employee?, it’s likely that a relationship failing one test also fails the other. Violators of one law are the low-hanging fruit.

What does that mean for businesses? It means that if the NLRB believes your company misclassified its independent contractors, they’ll share that information with the DOL, which would be pleased to piggyback on the NLRB’s finding and tag you with wage and hour violations as well. And vice versa.

The information sharing arrangement raises the stakes for alleged violators. Companies found to be in violation of one law are more likely to be found in violation of multiple laws. And that means more fines, more assessments, and more disruption to your business.

For the DOL and NLRB, the information-sharing arrangement means they’ll go after each other’s targets and seek to double up on penalties. For companies whose independent contractors may resemble employees, it means you’re the blackberry that’s about to get peed on.

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© 2022 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Welcome to Turkmenistan: Joint Employment Rules Rescinded, Leaving Massive Crater in FLSA Regulations

Tormod Sandtorv – FlickrDarvasa gas crater panorama CC BY-SA 2.0

No visit to Turkmenistan would be complete without a visit to the Darvaza Crater, more commonly known as the Door to Hell. This massive crater formed decades ago after a Soviet drilling rig collapsed. Roughly 40 years ago, the Soviets lit the crater on fire to burn off the methane. But Turkmenistan has some of the largest gas reserves in the world, which meant you couldn’t just make the gas go away.

The fire still burns today, and the massive fiery hole is an impressive sight.

A massive hole can also describe what the Wage and Hour Division (“WHD”) just created.

On July 29, the WHD formally announced the rescission of all of the regulations that define when joint employment exists under the Fair Labor Standards Act (“FLSA”).

The regulations, which can be found in Part 791 of 29 C.F.R., have existed in some form since 1958, which is right around the tenth anniversary of a magnitude 7.3 earthquake that killed up to 10% of the entire population of Turkmenistan.

In 2020, the Trump Administration revised the regulations to provide more clarity about who is a joint employer and when. The 2020 regulations listed specific factors that should be applied. The new rule sought to create consistency in place of the patchwork of different factors used by different courts in different circuits. The 2020 regulations also included 11 helpful illustrations of how the new rules would be applied in various situations.

Pro-business groups liked the new rule because it provided clarity and made it harder to be a joint employer. Pro-employee groups hated the rule because it provided clarity and made it harder to be a joint employer.

In March 2021, the Biden Administration announced an intent to rescind the 2020 regulations. On July 29, the rescission was formally announced. The rescission takes effect September 28, 2021.

In the formal rescission notice, the WHD notes that few courts had followed the new test and that a federal district court in New York had ruled that the 2020 regulations were invalid. (That case is now on appeal to the Second Circuit.)

What does the rescission mean?

Welcome to Turkmenistan! The rescission doesn’t reinstitute the 1958 regulations. It doesn’t provide new regulations. Instead, it strikes all of Part 791 and leaves an empty hole.

The new guidance is that there is no guidance.

No kidding. Here’s what the notice says:

Effect of Rescission

Because this final rule adopts and finalizes the rescission of the Joint Employer Rule, part 791 is removed in its entirety and reserved. As stated in the NPRM, the Department will continue to consider legal and policy issues relating to FLSA joint employment before determining whether alternative regulatory or subregulatory guidance is appropriate.

The WHD notice reminds us that courts have set forth their own tests, and those tests can be followed.

So where does that leave us? What’s the rule? Well, it depends where you live. Really! Different courts apply different tests. But for the most part, they are similar.

In general, there are two types of joint employment – vertical and horizontal.

Vertical joint employment is when one employer, such as a staffing agency, provides workers for the benefit of a second entity. Joint employment under the FLSA means that both entities are legally responsible for ensuring that the workers are properly paid a minimum wage and overtime. Both are also jointly liable for any FLSA violations, even though the staffing agency likely has full control over payroll. 

Based on court decisions, vertical joint employment will follow an Economic Realities Test, and joint employment will exist when “the economic realities show that the employee is economically dependent on, and thus employed by the other employer.” Multiple factors go into this analysis. These typically include:

  • Right to direct, control and supervise work;
  • Right to control employment conditions;
  • Permanency and duration of relationship;
  • Repetitive or rote nature of the work;
  • Whether the work is integral to the business;
  • Whether the work is performed on premises; and
  • Which entity performs the administrative functions characteristic of an employer (payroll, workers compensation, etc.)

Different courts articulate the test in different ways, but that’s a reasonable summary of the factors most commonly applied.

Any new interpretive guidance from the Biden WHD is almost certainly going to be that joint employment should be widespread and easy to establish. 

Horizontal joint employment is when two businesses under common control employ the same individual. This issue arises when a worker spends 30 hours at Business 1 and 30 hours at Business 2. If the businesses are joint employers, then the worker is entitled to 20 hours of overtime for the combined 60 hours of work.

The 2020 regulations did not materially change the test for horizontal joint employment. The 1958 version of the regulations looked at whether the two entities were “completely disassociated” from each other. Courts typically look at common control and common management as evidence of horizontal joint employment. That is not likely to change, but that regulation’s gone too.

Will There Be New Regulations?

Maybe. It seems more likely to me that we’ll see a re-issuance of the 2016 Administrator’s Interpretation on Joint Employment. The 2016 AI adopted an expansive view of joint employment, finding that it’s fairly easy to establish. The 2016 AI was issued by David Weil, who ran the WHD under Obama.  President Biden has nominated Weil to head the WHD in the current administration, so it would not be a surprise to see the 2016 AI or something similar re-issued.

Businesses should expect an expansive definition of joint employment, with little guidance or help from the WHD. With all regulations gone, and with different courts applying different tests, the landscape on joint employment resembles a massive crater filled with burning methane. It’s not a hospitable climate.

What Should Businesses Do?

Businesses should review their arrangements with vendors who provide labor and revisit those contracts and relationships. Steps can be taken to provide contractual protection against joint employment, even where the law will find a joint employment relationship.

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© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Watch for New Joint Employer Rule This Week

Who’s the white robed fella? I ask because it looks here like Ric didnt know this guy would be in his video.

While cleaning out the garage Saturday, I heard the Cars’ song “Magic,” which contains this nifty lyric: “Summer, It’s like a merry go round.” I then went down the rabbit hole of looking for the video, which features a collection of bizzaro characters at Rik Ocasek’s freakish pool party, including this probable leader of a religious cult.

The lyric stood out, though, because this summer is like a merry go round for joint employment. The rules are about to change again to make it much easier to establish joint employment under the FLSA.

I’ll keep this post short for two reasons:

  1. It’s beautiful outside and so I should not be inside on my laptop, and
  2. The real news on joint employment is coming sometime this week, but it’s not out yet as of Sunday midday when I am writing this.

Here’s what we know:

In March 2021, the Biden Administration indicated it would be rescinding the Trump joint employer rule, which made it hard to establish joint employment.

Last week, the White House announced that it had concluded its review of the new joint employer rule, which will be published imminently.

After it’s released, I’ll write more about it, quite possibly with another screenshot from a Cars video. Or “You Might Think I’ll screenshot another video. Maybe not. Like you, I am on the edge of my seat. But unlike you, that’s because I’m getting up to go outside. I’ll post more when we see the final rule.

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© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Biden Plan: Independent Contractor Misclassification Will Be An Enforcement Priority

Money
Get away
You get a good job with good pay and you’re okay
Money
It’s a gas
Grab that cash with both hands and make a stash
New car, caviar, four star daydream
Think I’ll buy me a football team

Pink Floyd just gets it. When I was a young lawyer, someone described civil litigation to me as just moving piles of money from one party to another. But that cynical view tells only part of the story. It excludes the emotion, frustration, stress, and workload involved in defending disputes and in dealing with the consequences, which can include destroying an entire business model.

For businesses making widespread use of independent contractors, all of these concerns are about to get worse.

President Biden’s proposed FY2022 budget includes expanding resources to combat independent contractor misclassification. The Administration’s “commitment” to combatting misclassification is spelled out pretty unambiguously on page 15:

The Administration is also committed to ending the abusive practice of misclassifying employees as independent contractors, which deprives these workers of critical protections and benefits. In addition to including funding in the Budget for stronger enforcement, the Administration intends to work with the Congress to develop comprehensive legislation to strengthen and extend protections against misclassification across appropriate Federal statutes.

The President’s proposal includes $14.2 billion for DOL enforcement efforts, including to “address the misclassification of workers as independent contractors.” This represents a $1.7 billion increase from 2021.

Expect the Department of Labor to place much greater scrutiny on independent contractor relationships than during the Trump Administration. The nomination of David Weil to head up the Wage and Hour Division signals that the President is serious about this enforcement priority. Weil served in the same role under Obama, and he made independent contractor misclassification a focal point of his enforcement efforts.

If your independent contractor arrangements have not been closely examined recently, it’s time for a check up. $14.2 billion for enforcement efforts is a lot of money. I think I’d buy me a football team.

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© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Half Man, Half Goat: Can Arbitration Agreements Bind the DOL?

The one on the left is now 6-foot-5. The one on the right? Whereabouts unknown.

When my kids were younger, we used to play a guessing game. The questioner would think of someone, real or imaginary. The object was to figure out who. We’d go around the table, and each person gets one question that could only be answered with yes or no, then they’d get one guess. Then it goes to the next person to ask one and guess one.

The best strategy was to ask broad questions first: Is the person real? Is the person alive? Then narrower: Have I ever met the person? Is it someone in our family? It usually took about 10 questions for someone to figure it out, even if the answer was obscure or fictional.

The running gag in our house, though, was that sometimes the answer would be “half-man, half-goat.” I don’t remember how that started, but it’s still a thing in our house. Is it half-man, half-goat? Yes.

This creature has many of the great powers inherent to goats (can butt heads without feeling pain, eats paper cups), but it can’t do everything a goat can do because it’s also saddled with being half-man.

Arbitration agreements can be like that too, especially when included in independent contractor agreements. Arbitration clauses can require independent contractors to arbitrate all disputes, including misclassification claims. One of the great powers of an arbitration clause is the power to require claims to be resolved individually, with each party waiving the right to file class or collective actions. Another great power is to keep the proceedings mostly confidential, in contrast to a court proceeding, which is open to the public.

But one thing arbitration agreements can’t do is bind governmental agencies. A recent decision from the Ninth Circuit Court of Appeals reminds us that if the Department of Labor (DOL) claims that a business is misclassifying its independent contractors, that dispute is not subject to arbitration. The DOL can escalate the dispute to court.

The Ninth Circuit ruling reminds us that the DOL is not a party to the arbitration agreement and, therefore, cannot be bound by it. Government agencies also have different interests than private litigants. When the government files suit, it can aim to deter similar misconduct and “vindicate a public interest.” Like a bureaucratic superhero.

This outcome is no surprise. In 2002, the Supreme Court ruled that the EEOC was not bound by an arbitration agreement and could pursue relief outside of arbitration for the same reason. The same rule applies for the DOL.

The lesson here is to remember that arbitration agreements can be valuable in many ways, but they’re also a bit (just a bit) like playing with only half a goat. They can’t do it all. When drafting independent contractor agreements, arbitration clauses can be helpful, but they can’t prevent all lawsuits–especially those filed by a government agency.

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© 2021 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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