What is the Test for Independent Contractor vs. Employee? (Jan. 2019)

what is the test for independent contractor misclassificationSeems like a simple question, but it isn’t. My question to your question is, “Why do you ask?” That’s because the test for Independent Contractor vs. Employee is different under different laws.

And worse, the tests keep changing, as we saw in Monday’s post about the NLRB’s SuperShuttle decision.

As of today, January 31, 2019, here’s where we stand:

The current tests for determining Independent Contractor vs. Employee are:

National Labor Relations Act (NLRA)

Right to Control Test (SuperShuttle version, as of 1/25/19)

Title VII, Age Discrimination in Employment Act (ADEA), ERISA

Right to Control Test (Darden version, or some variant of it, as applied circuit by circuit)

Internal Revenue Service

Right to Control Test (IRS version)

Affordable Care Act

Right to Control Test (emphasis on particular factors, based on regulation)

Fair Labor Standards Act (FLSA)

Economic Realities Test (which different courts articulate differently)

California, Massachusetts wage & hour laws

ABC Tests (strict version of Part B)

New Jersey wage & hour

ABC Test (regular version of Part B)

California state laws other than wage & hour

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.

  1. 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.
  2. 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.
  3. 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!)

  1. Know the tests that apply where your business operates.
  2. 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.
  3. 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.
  4. Re-evaluate existing relationships, and make changes from time to time.
  5. 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.
  6. 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.

For more information on joint employment, gig economy issues, and other labor and employment developments to watch in 2019, join me in Philadelphia on Feb. 26 or Chicago on Mar. 21 for the 2019 BakerHostetler Master Class on Labor Relations and Employment Law: Meeting Today’s Challenges. Advance registration is required. Please email me if you plan to attend, tlebowitz@bakerlaw.com. If you list my name in your RSVP, I will have your registration fee waived.

© 2019 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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What It Means to “Suffer” in California, Independent Contractor Version

suffer or permit to work California

This article describes how gestures that are common in the U.S. can have very different meanings abroad. For example, the “ok” finger gesture is a vulgar bodily reference in Brazil, Germany, and Russia. (Not ok!) The thumbs up gesture in Greece or the Middle East can mean “up yours!” The University of Texas’s “hook ‘em horns” gesture in Italy means you’ve been cuckolded — your wife is cheating on you.

Same thing, different meaning.

To employers, California often feels like a foreign country. It has some of the most employee-friendly laws in the nation, creating migraines for multi-state employers. When it comes to interpreting legal phrases, California lives up to its reputation, especially in the Employee vs. Independent Contractor context.

Today we look at California’s definition of “employ” as it relates to determining whether someone is an employee or an independent contractor.

California’s wage and hour laws are set forth in the state’s Industrial Wage Orders, a bulky set of directives that set the rules for minimum wage, overtime, meal and rest breaks, and various record keeping requirements for California employers. These rules apply only to employees, not independent contractors, but the test for determining Who Is My Employee? in California is different than under any federal law.

California’s Industrial Wage Orders use the same language to define “employ” as used in the federal Fair Labor Standards Act (FLSA). But fittingly, the Republic of California applies a different meaning to the same phrase.

California’s wage and hour laws provide three alternative definitions for “employ”: (1) to exercise control over the wages, hours, or working conditions, (2) to suffer or permit to work, or (3) to engage, thereby creating a common law employment relationship.

The FLSA also defines “employ” as “to suffer or permit to work.”

On Monday, we described how the FLSA’s “suffer or permit” standard is applied when determining whether someone is an employee or an independent contractor.

Today’s post describes California’s test for the same phrase. It’s different. Hook ‘em horns.

Historically, California courts have rejected the federal interpretation of “suffer or permit” as not being broad enough. California courts interpret the phrase more literally. If you permit someone to work, that person is likely your employee.

In April 2018, California’s Supreme Court set up a test that cemented that expansive interpretation into law.

In Dynamex Operations West v. Superior Court, the California Supreme Court ruled that, to determine whether someone is an employee or an independent contract, an ABC Test must be used.

An ABC Test sets a higher bar than a Right to Control Test or an Economic Realities Test. It also sets a higher bar than California’s S.G. Borello test, which is the hybrid Right to Control/Economic Realities Test that California had been using since 1989 to answer the Employee vs. Independent Contractor question.

California’s ABC Test starts with the presumption that, for claims covered under California wage orders, every worker is an employee. Then, to prove otherwise, the business retaining that worker must prove (all 3):

(A) the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact, and

(B) the worker performs work that is outside the usual course of the hiring entity’s business, and

(C) the worker is customarily engaged in an independently established trade, occupation, or business.

Fail just one part, and the worker is an employee under California wage and hour law. This new test is even stricter than most other states’ ABC Tests, which usually include two ways that Part B can be satisfied.

As of now, the Dynamex test applies only to claims brought under California wage orders, we think.  These claims generally include minimum wage, overtime, and meal and rest break claims. So far, this test does not appear to apply to claims such as failure to reimburse expenses or failure to provide employee benefits.

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Pain, Humiliation & Self-Pity: How Does the Definition of “Employ” Relate to Independent Contractor Misclassification?

Suffer or Permit to Work FLSA Definition of Employ

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.

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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New Rule May Clear Up ‘Employee vs Contractor’ Test under FLSA, But Not Quite Yet

DOL joint employment

New regulations may soon be proposed to redefine “employee” under federal wage and hour law. In a recent interview with Bloomberg BNA, Secretary of Labor Alex Acosta hinted that the DOL is working on a new regulation that would more definitively speak to who is an employee and who is an independent contractor.

The Fair Labor Standards Act (FLSA), the federal law governing minimum wage and overtime for employees, does not apply to independent contractors. That’s one of the reasons it matters whether someone is classified as an employee of a contractor. Contractors are not entitled to a minimum wage or overtime under federal law.

The FLSA was passed in the 1930s and does not fit the modern gig economy. Secretary Acosta appears committed to modernizing the regulations, which would bring much needed clarity to the question of who is an employee and who is an independent contractor.

In terms of priorities, the DOL appears likely to address the definition of “joint employment” first.

The National Labor Relations Board (NLRB) has initiated formal rulemaking procedures that would result in a new regulation defining joint employment more narrowly under federal labor law.  The DOL has indicated it has plans to follow suit, using rulemaking procedures to seek a new regulation redefining “joint employment” under the FLSA. We can probably expect to see a new proposed FLSA regulation redefining “joint employment” by early 2019.

Based on Secretary Acosta’s comments to Bloomberg BNA, it seems likely that the DOL will turn it’s attention to the Independent Contractor vs Employee conundrum next.

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Is this weird trick the key to defeating independent contractor claims? (Hahahahahaha. No.)

Weird trick to defeat independent contractor claims Jani-King

As everyone with an internet connection now knows, articles promising “one weird trick” to solve some real-world problem are everywhere. These articles are annoying. (It’s called clickbait.) You open up the article, and the “weird trick” is usually something you already knew anyway. Or the weird trick just doesn’t work.

So what’s the “weird trick” here?

Requiring independent contractors to form corporate entities. Then you have a business-to-business contract, not employment. Right?

Ok, it’s not weird at all. Lots of companies use this approach.

But does it work? Not necessarily.

Let’s consider the issue under the Fair Labor Standards Act (FLSA). The FLSA requires employees to be paid a minimum wage and overtime (unless there’s an exemption) and requires employers to keep certain kinds of pay records.

The test for determining whether someone is an employee under the FLSA is Ye Olde Economic Realities Test. 

Dear Reader, hold onto your seat, because we’re about to see this test in action!

Can you defeat independent contractor misclassification claims by requiring workers to form legal entities? Let’s see…

A federal appeals court recently considered a dispute involving Jani-King and its franchise model for providing janitorial services. Under Jani-King’s business model, the individuals who provide cleaning services are not treated by Jani-King as its employees. Rather, Jani-King requires that anyone who wants to provide janitorial services under the Jani-King name must form a legal entity, like an LLC. Then Jani-King enters into a franchise agreement with the LLC, and the LLC/franchisee provides the cleaning services. There is no job offer or employment agreement between Jani-King and the individuals performing the services. It’s all treated like a business-to-business, franchisor-franchisee relationship.

The Department of Labor (DOL) is questioning the legitimacy of this model.  The DOL began an investigation and then filed a lawsuit, claiming that Jani-King’s franchisees are really Jani-King’s employees under the FLSA, and Jani-King therefore had to comply with FLSA record-keeping requirements, as well as its overtime and minimum wage rules.

The reason Jani-King’s “one weird trick” doesn’t necessarily work is because to determine whether someone is an employee under the FLSA, it doesn’t matter what you call the worker. You can call the worker a contractor or a franchisee, but using that tag doesn’t mean the worker is not an employee under the FLSA. That’s a legal determination made using the Economic Realities Test.

In this case, the trial court judge in Oklahoma had dismissed the DOL’s case, ruling that Jani-King’s contracts were with entities, not individuals, so there could not be an employment relationship. The Tenth Circuit Court of Appeals, however, said that’s not true. 

The Court of Appeals ruled that a six-part Economic Realities Test must be used to determine whether the individual franchisees who performed the janitorial work should be considered employees under the FLSA. Under the Economic Realities Test, a court must examine the economic realities of the relationship, not merely rely on the parties’ labels. 

In the Tenth Circuit (which covers Oklahoma, New Mexico, Kansas, Colorado, Utah, and Wyoming), here are the factors to consider under the Economic Realities Test:

1) The degree of control exerted by the alleged employer over the worker; 

2) The worker’s opportunity for profit or loss; 

3) The worker’s investment in the business; 

4) The permanence of the working relationship; 

5) The degree of skill required to perform the work; and 

6) The extent to which the work is an integral part of the alleged employer’s business.

The not-so-weird trick of requiring workers to set up a legal entity does not necessarily work. It can be helpful, but only if the facts show that the entity is not economically reliant on the other party. The facts matter, not the labels.

This case is headed back to the trial court for some fact-finding to determine how these six factors play out.

In the meantime, remember that “one weird trick” to solve some real-world problem is probably not weird at all, and it may or may not work. But it may arouse your curiosity and cause you read the article. Here, Jani-King’s one weird trick aroused the DOL’s curiosity, which is not something a business should want to do.

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Five Things You Should Know About Joint Employment

Everyone knows that two’s company but three’s a crowd. Except, of course, for Three’s Company with Jack, Janet, and Chrissy (or Cindy or Terri). But how many of you recall that one is the loneliest number that you’ll ever do? Two can be as bad as one. It’s the loneliest number since the number one. I know this because of Three Dog Night.

For musical tastes, the number four can mean Tops, Seasons, or Non Blondes.

But today’s number is FIVE.  Here are Five Things You Should Know About Joint Employment.  (click here to download the PDF.)

Five things You Should Know About Joint employment - page 1 screenshot

Five things You Should Know About Joint employment - page 1 screenshot

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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What is the Test for Joint Employment? It Depends.

Joint employment together

There are lots of ways to be together. Some are good, some less good.

Let’s compare:

  • By the end of the movie Grease, the graduates of Rydell High have decided that they “go together like rama lama lama ka dinga da dinga dong.” That, I think, is supposed to mean good.
  • In The Fox and Hound 2, a direct-to-video DisneyToon generally rated as “not terrible,” our four-legged heroes sing that they “go together like wet dog and smelly peanut butter jelly fleas on my belly.” That sounds less good.

In employment law, being together can be good or bad, depending on your perspective.

When a company retains someone else’s employees to perform work, it sometimes becomes necessary to decide whether the first company is a “joint employer” of the second company’s employees. Being a joint employer is not illegal, but it means that if the primary employer violates employment laws, a “joint employer” is liable too — even if it wasn’t primarily responisble for the unlawful act.

The test for joint employment varies depending on which law was violated and depending on the state you’re in. (Here’s a map that illustrates the madness.) For example…

In this post we discussed how you determine if someone is a joint employer under federal wage and hour law (the Fair Labor Standards Act) (FLSA).

In these posts, we discussed how you currently determine whether someone is a joint employer under federal labor law (the National Labor Relations Act) (NLRA). In this post, we discuss how and when that test is likely to change.

In today’s post, we’ll examine how you determine whether someone is a joint employer under federal employment discrimination and breach of contract law. For these laws, the test for joint employment looks to the common law of agency.

A recent decision by the federal Court of Appeals for the 11th Circuit reminds us that different tests apply to different laws. Applying the joint employment test for FLSA claims, the trial court had ruled that a citrus grower was the joint employer of migrant workers after the primary employer who hired them did not properly pay them.  (The farm-labor contractor who hired them allegedly demanded kickbacks from the migrant workers’ wages under threat of deportation. Today’s Tip: Don’t do that.)

The migrant workers had another claim too. They alleged breach of contract under federal law (the contract was part of the federal visa process), and it tried to sue both the farm-labor contractor who was demanding the kickbacks and the citrus grower at whose fields they picked delicious fruit.

For the breach of contract claim, the Court of Appeals ruled that the proper way to determine whether someone is a joint employer is to use a Right to Control Test.

There are different versions of Right to Control Tests, but they all try to determine whether a hiring party retains the right to control how the work is performed. If the answer is “yes they do,” then the hiring party is a joint employer under that law. If the answer is “no they don’t, they care about the achieving the result but not how the work is performed,” then the hiring party is not a joint employer.

This Court of Appeals decided that there are 7 factors that should be used to determine whether someone is a joint employer under federal breach of contract law. (The same test would generally apply to federal employment discrimination claims.) State laws may differ. Here are the 7 factors that this court used to determine whether someone is a joint employer under federal breach of contract law:

1. Does the alleged joint employer have the right to control how the work is performed?
2. Does the alleged joint employer provides the tools?
3. Is the work being performed at the worksite of the alleged joint employer?
4. Does the alleged joint employer provide employee benefits?
5. Does the alleged joint employer have the right to assign additional work?
6. Does the alleged joint employer have discretion over when and how long the workers work?
7. Is the work being performed a part of the alleged joint employer’s regular business?

In this case, applying the 7 factors, the Court of Appeals ruled that the citrus grower did not exert much control and therefore was not a joint employer for the breach of contract claim — even though it was a joint employer for the FLSA claim. (The FLSA uses an Economic Realities Test, not a Right to Control Test, to determine whether someone is an employer.) That’s right — different tests, different results.

The citrus grower did not want to be a joint employer because it was not part of the alleged kickback scheme and did not want to be held jointly responsible. Nonetheless, it was found to be a joint employer under the FLSA but not under the breach of contract claim. Confusing stuff.

When making music, being together seems so much simpler, although much more prone to nonsense words. Just ask the Turtles, who in 1969 were “so happy together Ba-ba-ba-ba ba-ba-ba-ba ba-ba-ba ba-ba-ba-ba.”

© 2018 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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