The Waseda University Library in Tokyo maintains an online archive of drawings dedicated to epic Japanese fart battles of the 17th and 18th centuries. The depictions, called he-gassen (really!), show farts so powerful they penetrate walls and blow cats out of trees.
This mode of attack must have been intimidating, but approaching enemies should have smelled what was coming and taken evasive action.
The same can be said for a Nevada telecommunications company, which had engaged 1,400 call center workers but treated them all as independent contractors. In the immortal words of Daryl Hall, no can do.
Under federal wage and hour law, the Economic Realities Test is used to determine whether a worker is an employees, regardless of what the parties call the relationship. In this case, the telecom company failed virtually every part of the test. The workers were economically reliant on the telecom company, which controlled their work in just about every relevant way, making the workers employees.
The facts were so bad that the Department of Labor took the laboring oar on this one, filing its own lawsuit in federal court. The DOL won a $1.4 million award, and the Ninth Circuit Court of Appeals upheld the decision.
Remember, a worker’s status as an employee or independent contractor is determined using the legal test and the facts of the relationship, regardless of what the parties call themselves.
The moral of the story is that if it smells like an employment relationship, it probably is. Choose your battles wisely. He-gassen!
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.
A Swedish study concluded that baboons, pig-tailed macaques, and squirrel monkeys have some of the worst short-term memories in the animal kingdom, barely exceeding that of bees. The point is, never ask a pig-tailed macaque where you left your car keys.
Having a short memory can be a problem in some situations, but not it’s not an issue if you’re just trying to recall the latest Department of Labor test for independent contractor misclassification. Everything you recall from six weeks ago is being undone anyway. (Or Undun, if you’re a fan of the spelling-impaired Canadian band The Guess Who.)
Remember the new rule issued by the DOL in January 2021 for determining employee vs. independent contractor status? It was going to modify the Economic Realities Test to focus on two core factors: (1) the nature and degree of the worker’s control over the work, and (2) the worker’s opportunity for profit or loss based on personal initiative or investment. The new rule was to take effect March 8. The test would apply only to claims under the Fair Labor Standards Act (FLSA).
No more. Last week, the DOL delayed implementation until May, but the rule most likely will be rescinded completely. Undun.
This decision comes on the heels of the DOL rescinding two opinion letters that were also issued in January. Undun. The letters provided guidance on determining independent contractor status in a few particular situations.
The Economic Realities Test remains the test used to determine who is an employee under the FLSA. It’s a multi-factor balancing test.
So if you’ve been relying on recent DOL guidance for how to apply that test, channel your inner pig-tailed macaque. Whatever you recall from January can be forgotten. And where did I put my car keys?
Sign up now for the BakerHostetler 2021 Master Class on The State of Labor Relations and Employment Law. Twelve sessions, one hour every Tuesday, 2 pm ET, all virtual, no cost. Click here for more information. List me as your BakerHostetler contact so I know you’ve registered.
Hungry for more COVID-19 info? I can help with that, but if your hunger pangs are for something more exotic — say, deep-fried bull testicles — I’m sorry to say you’re out of luck. Deerfield (Mich.) American Legion Post 392 has cancelled its 19th annual Testicle Festival, leaving festival supplier Dennis Gerth with 330 pounds of bull testicles in his freezer. That’s my 2020 submission if anyone is giving out awards for Sentences I Never Thought I’d Write.
Yes, the coronavirus is affecting society in ways we never imagined. Last week, Congress offered some relief to workers affected by the virus. While the new law doesn’t help Gerth or his ball-filled freezer, it does provide paid leave for employees of most small businesses.
But what about independent contractors?
The Families First Coronavirus Relief Act provides up to 12 weeks of partially paid time off for employees unable to work (or telework) for childcare reasons and up to 80 hours of paid sick time to employees unable to work (or telework) for six specified reasons.
Trying to apply the Act raises a lot of questions. Many are addressed here, in a conversational tone that acknowledges this is awfully confusing. But this post will focus on how the Act applies to independent contractors.
Do Independent Contractors Get the Benefits of the Act?
No. The Act provides paid sick leave and expanded Family and Medical Leave Act (FMLA) leave only to employees, and only if their employer has fewer than 500 employees.
How Does the Act Differentiate Between an Employee and an Independent Contractor?
Ah yes, the age old question of Who Is My Employee? The Act uses the definitions of “employee” in the FMLA and the Fair Labor Standards Act (FLSA). The FMLA uses the FLSA definition, so let’s focus on that.
The test for whether an independent contractor is really an employee under the FLSA is determined by using an economic realities test. This is a different test than the ones used for determining whether someone is an employee under tax, unemployment, workers compensation, and many other federal and state laws.
The economic realities test generally looks at these factors:
The extent to which the services rendered are an integral part of the principal’s business.
The permanency of the relationship.
The amount of the alleged contractor’s investment in facilities and equipment.
The nature and degree of control by the principal.
The alleged contractor’s opportunities for profit and loss.
The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
The degree of independent business organization and operation.
This list is from DOL Fact Sheet #13, but it’s worth noting that different courts define the factors differently. Know your jurisdiction. Another commonly used listing of the factors can be found here.
The more independent the worker is from the business retaining his/her services, the more likely the worker is properly classified as an independent contractor.
How Could this Issue Arise?
With the economy in a cornoravirus-induced tailspin, lots of employees are losing their jobs, and lots of independent contractors are losing their engagements. When the income stream stops flowing, people look for a way to reopen the faucet.
Independent contractors might file unemployment claims. We’ve discuss the dangers of that here. They might also be tempted to file lawsuits claiming they’ve been misclassified. A successful claim could mean they’re entitled not only to the benefits of the Families First Act, but also potentially to unpaid overtime and other benefits that employees can receive.
Times are tough, and livelihoods are at stake. As contractors lose more work, we’re likely to see an increase in independent contractor misclassification claims. And that’s no bull.
When I throw my dog a bone, she is so happy. She goes and gets it, eats it, and wonders why she is unable to speak to express her gratitude. She doesn’t wonder, “Why is he throwing me a mere bone instead of an entire squirrel?” The bone is enough for complete contentment.
Ohio lawmakers have thrown franchisors a bone. They’ve limited the circumstances when franchisors can be held jointly liable if individual franchise owners commit certain Ohio employment law violations.
Under the new law, franchisors are not jointly liable for minimum wage, overtime, or pay frequency violations by franchise owners and are not jointly responsible for franchise owners’ responsibilities under unemployment insurance and workers’ compensation law — unless: Continue reading →
According to IMDb, the highest rated episode of CHiPs was Christmas Watch. Thieves at the community church ran off with a 15th century bell, which meant — according to IMDb — “The Christmas season doesn’t mean any less work for Jon and Ponch!”
Well ho ho ho then. The Christmas season means lots of extra work for lots of other people, including real life police officers. A recent case in the Sixth Circuit Court of Appeals addressed whether police officers taking second jobs are independent contractors or employees.
The test for Independent Contractor vs. Employee under the Fair Labor Standards Act (FLSA) is well-established. It’s the Economic Realities Test, a multi-factor test that seeks to determine whether, as a matter of economic reality, the worker is reliant on the hiring party to earn a living.
But in Acosta v. Off Duty Police Services, the Court of Appeals questioned whether the usual formula should still apply in the modern gig economy, when lots of people take second jobs.
S.G. Borello & Sons Test (customized hybrid version of Right to Control & Economic Realities Tests), we think, for now
State Unemployment and Workers Comp Laws
Pick a card, any card. Tests vary substantially state to state. Some are Right to Control Tests, some are ABC Tests, some are entirely made-up, customized tests that require consideration of — or proof of — specific factors
Other State Laws (wage & hour, discrimination, tax)
Tests vary significantly state by state, law by law
This chart may be a helpful start, but three significant challenges remain, when trying to determine Independent Contractor vs. Employee.
Fifty Shades of Gray.These tests, for the most part, are balancing tests. Courts and agencies must weigh multiple factors. In most instances, some factors will favor contractor status and some will favor employee status. Different courts may reach different conclusions, even with the same facts.
Planes, Trains, and Automobiles. Multi-state employers face the added challenge of having to deal with different tests in different states. Then, just to keep everyone on their toes, states generally apply different tests for different state laws. Sometimes different tests apply in different industries too. Transportation workers, for example, may be subject to different tests than construction workers.
Into the Wild. The tests keep changing. In January 2019, the NLRB changed its test in the SuperShuttle case. In 2018, California changed its test under state wage and hour law from the S.G. Borello balancing test to a strict ABC Test. In 2015, New Jersey switched to a different version of an ABC Test for its state wage and hour law. The times they are a-changin.
What to do about it? (Free tips!)
Know the tests that apply where your business operates.
Construct your independent contractor relationships in a way that tends to favor the factors supporting independent contractor status. Inevitably, business considerations will get in the way, and tough decisions will have to be made about how much control can be relinquished and how the relationships need to be structured. Adjust the facts of the relationship.
Use a customized independent contractor agreement that emphasizes the factors that support independent contractor status. Avoid off-the-shelf agreements. Merely reciting that everyone agrees the relationship is an independent contractor relationship is only a teeny bit helpful. “Teeny bit helpful” is not the gold standard.
Re-evaluate existing relationships, and make changes from time to time.
Implement a gatekeeper system to prevent operations managers from entering into contractor relationships that may be invalid. Require any retention of a contractor to be approved by a point person, who can issue spot and seek help in evaluating whether a contractor relationship is likely to withstand a misclassification challenge.
Seek legal help before you get audited or sued. Now is the time to review and modify relationships to reduce the likelihood of a misclassification claim. Once a claim is made, your business can only play defense. Create your playbook now, before the defense has to take the field.
According to the New World Encyclopedia, examples of “suffering” include pain, illness, disability, hunger, poverty, grief, hatred, frustration, heartbreak, guilt, humiliation, anxiety, loneliness, self-pity, and death.
According to federal wage and hour law, “suffer” means employment.
Ouch. Happy Monday.
One of the many problems with the Fair Labor Standards Act (FLSA) — the federal law that sets minimum wage and overtime standards — is that it’s archaic, outdated, old. It was passed in 1938. Before Hitler invaded Poland. Before the first Captain America comic book. Even before the invention of the Slinky.
In 1938, Mick Jagger wasn’t even born yet. (But Betty White was 16.)
The language used in the FLSA reflects a different era. In the definitions section of the Act, “employ” includes “to suffer or permit to work.” What exactly does that mean? At the time it was written, what did Congress intend for it to mean? And what does it mean now, in the modern economy, especially when trying to determine whether a worker is an employee or an independent contractor?
According to the FLSA regulations, if “the employer knows or has reason to believe that [the individual] is continuing to work,” then the time is working time. It’s employment. Even work that is “not requested” is work time if the employer permitted the work to be done.
When asking the question, Who Is My Employee?, this broad definition presents a challenge. As the Supreme Court has recognized, this definition is broader than the ordinary “common law” definition of employment, which looks at the extent of control the employer exercises (or has the right to exercise) over the worker. That’s the Right to Control Test, which is discussed in more detail here.
Because the definition of “employ” is different under the FLSA than under most other employment laws, the test for determining Who Is My Employee? is different too.
The FLSA uses an Economic Realities Test to determine whether a worker is an employee (as compared to an independent contractor).
The Economic Realities Test is expressed slightly differently by different federal courts but, in general, the test asks whether the worker is economically reliant on the potential employer to earn a living. If economically reliant, the worker is likely an employee. If the worker has other sources of income or is business for himself/herself, the worker is more likely an independent contractor, not an employee.
The Economic Realities Test is described in more detail here.
So that’s how the federal courts interpret the “suffer or permit to work” language in the FLSA. But to keep things interesting, California’s wage and hour laws use the same “suffer or permit” language in its state law definition of “employ,” but California interprets that phrase differently and imposes a different test. Same standard, different test.
As we will discuss in Thursday’s post, California’s alternative interpretation of that same phrase can lead to very different results when evaluating whether someone is an employee or independent contractor.
It’s California’s definition — more than the federal definition — that is more likely to cause pain, illness, disability, hunger, poverty, grief, hatred, frustration, heartbreak, guilt, humiliation, anxiety, loneliness, or self-pity. To the Golden State’s credit, though, probably not death. Good job, California.
Domino’s Pizza in Russia recently had to cancel a promotion offering free pizza for life to anyone who got a tattoo of the Domino’s logo after too many people tatted up. The Russian franchisee that offered the promotion was overwhelmed by the response. It canceled the scheduled two-month promotion after just four days.
Franchise owners have to adhere to brand standards, but they have flexibility on other things, such as how vigorously to encourage their customers to ink. It can be confusing to the public, however, which decisions are made by franchisors and which decisions are made by franchisees. Not surprisingly, this confusion extends to employment situations, where claims of joint employment are frequently asserted against franchisors, even though individual employment decisions are made by franchisees.
In a delicious decision for franchisors, a New York federal court has ruled that Domino’s Pizza’s corporate entities are not joint employers of the employees who work at individually owned Domino’s franchises – at least under federal and New York State wage and hour law. (Click here for Five Things You Should Know About Joint Employment.)
Joint employment claims are a constant threat in the franchise space. Major restaurant and fast food franchisors are frequently alleged to be joint employers when plaintiffs bring employment lawsuits against individual franchisees. The franchisors (like Domino’s) are viewed as the deep pockets and, by targeting the franchisor’s corporate office, plaintiffs can try to build class actions that include groups of employees across multiple franchises. Or, by tagging a franchisee as a joint employer, plaintiffs can feel more confident that enough dollars will be available to pay any judgment.
The court’s ruling, which granted summary judgment to Domino’s corporate entities, evaluated the plaintiffs’ joint employment claims under the Fair Labor Standards Act (FLSA) and New York Labor Law (NYLL) using a two-part Economic Realities Test.
Following guidance from the Second Circuit Court of Appeals, the court looked at two sets of factors: one set to assess formal control exercised by the franchisor, and the second set to assess functional control by the franchisor. (That’s not the test used everywhere.)
As is typical in franchisor-franchisee relationships, the franchisee (store owner) signed a franchise agreement, agreeing that it – not the franchisor – “shall be solely responsible for recruiting, hiring, training, scheduling for work, supervising and paying the persons who work in the Store and those persons shall be [franchisee’s] employees, and not [franchisor’s] agents or employees.” The agreement required the franchisee to adhere to brand standards to ensure consistency in product, but individual employment decisions were to be made at the store level, not by the franchisor.
Based on this framework, the court analyzed the facts using the formal control factors and the functional control factors.
The formal control factors included whether the franchisor:
had the power to hire and fire the employees,
supervised and controlled employee work schedules or conditions of employment,
determined the rate and method of payment, and
maintained employment records.
The functional control factors for determining joint employment, some of which do not even make sense in the context of a franchise relationship, are:
whether the alleged employers’ premises and equipment were used for the plaintiffs’ work;
whether the subcontractors had a business that could or did shift as a unit from one putative joint employer to another;
the extent to which [the] plaintiffs performed a discrete line job that was integral to the alleged employers’ process of production;
whether responsibility under the contracts could pass from one subcontractor to another without material changes;
the degree to which the alleged employers or their agents supervised [the] plaintiffs’ work; and
whether [the] plaintiffs worked exclusively or predominantly for the alleged employers.
After evaluating the facts using these factors, the court ruled that the Domino’s corporate franchisor entities were not joint employers. The franchisor entities were therefore dismissed from the lawsuit, but the court allowed the case to continue against the individual franchise owners.
The decision is refreshing for franchisors, but not too refreshing. As noted here, other Courts of Appeal – mainly the Fourth Circuit – apply different tests for determining whether a company is a joint employer under the FLSA, even though the FLSA is a federal law that you would think would be interpreted the same way all across the country.
For now, franchisors should rejoice in this small victory, but the fight to protect franchisors against joint employment claims is far from over — unlike the Russian tattoo promotion, which is entirely kaput.
In June 2017, the DOL withdrew its Obama-era 2015 and 2016 informal guidance on joint employment and independent contractors. The memos covered federal wage and hour law (FLSA). Eight months later, what effect has that decision made?
Remember, the 2015 and 2016 memos did not change the law on independent contractor misclassification or joint employment. Rather, the memos were an attempt by the Wage & Hour Administrator, David Weil, to summarize existing law – but with a pro-employee leaning. The memos selectively interpreted court decisions that supported Weil’s view of the world, i.e., that most workers are employees. When Weil left, the DOL said goodbye to his interpretations as well.