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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The Ohio Supreme Court Just Made It Much Harder to Win a Misclassification Dispute

In the middle of the Bering Sea sit two islands, Little Diomede (U.S.) and Big Diomede (Russia). They sit less than three miles apart, but Big Diomede is 21 hours ahead. That’s because the International Date Line straddles the two. This would make scheduling play dates nearly impossible, but fortunately no one lives on Big Diomede. Little Diomede is home to about 115 brave (and very isolated) souls.

The Diomedes are a great example of being close but still so far away. The Ohio Supreme Court gave us another example in a worker misclassification dispute earlier this month. Ohio companies should pay close attention to this surprising — and bad — decision.

In this case, the Bureau of Workers’ Compensation (BWC) had determined that an underground-cable installation company had misclassified its workers as independent contractors rather than as employees.

The BWC looked back 5 years and handed the company a bill for $350,000 in back assessments for failing to pay into the workers compensation system. Companies pay into the system for employees, but not for contractors. The company appealed, arguing that under Ohio’s Right to Control Test, the installers were properly classified as contractors, meaning the back assessments were not warranted. The company provided evidence showing that the Right to Control factors tilted in favor of contractor status.

The Ohio Supreme Court reviewed the evidence and did not disagree with the company. You’d think, therefore, that they’d reverse the BWC decision, and the company would be relieved from paying the back assessments.

Nope.

The company was close, but oh so far from winning its appeal. That’s because the deck is stacked heavily against companies when it comes to challenging the BWC on worker classification determinations.

The Ohio Supreme Court ruled that, under Ohio law, so long as there is “some evidence” that could support the BWC’s conclusion, the BWC’s decision was untouchable. This is insane.

In every case involving a balancing test — like the Right to Control Test used here — there will be at least some evidence supporting employee status and some evidence supporting contractor status. The point of the test is to weight the competing factors and see which direction the scales tilt.

But according to this ruling, Ohio law grants the BWC an absurd level of deference. The decision appears to say that a court must accept the BWC’s conclusion, even if the scales tilt the other way, so long as there is “some evidence” to support the BWC’s findings.

For Ohio businesses using independent contractors, this ruling means trouble. The BWC is, of course, incentivized to find misclassification because it means more money for the state. After this ruling, companies appear to have little recourse for challenging the BWC, even when the BWC is wrong.

Ohio companies should immediately evaluate their misclassification risks. If a contractor gets hurt and brings a workers comp claim, the BWC will look for misclassification. If the BWC finds it, the BWC will not only grant workers comp coverage for the injured contractor, it will issue back assessments against the company for failing to pay into the workers comp system — with a look back of five years.

Back assessments can also be triggered by an audit.

Same for unemployment. An unemployment claim by a contractor can lead to the same result, with Ohio Job & Family Services making the misclassification call. Back assessments would issue in that scenario too for failing to pay into the unemployment fund.

This ruling goes against the whole point of having a balancing test. I might have expected this level of deference from California or New York, but not Ohio. This ruling was issued by a Republican-majority Supreme Court.

Like the Diomedes Islands, what appears close can be so far away. Your business might be able to show all the reasons why your contractors are properly classified, but it doesn’t even have to be a close call for you to lose. If BWC finds misclassification and there’s merely “some evidence “ to support its conclusion, you might as well be arguing your point in Russian, the language of all zero inhabitants of Big Diomede.

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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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Bobcat vs Python: Franchisors Stuck with ABC Test, Says Mass. Court

Yes, this is the actual clip!

I just got back from Miami, where this happened. According to The Miami Herald, a very badass bobcat was caught on video taunting a 120-lb python by swatting at it and eating its eggs. Despite giving up 100 lbs to the python, the bobcat reigned supreme. Unbeknownst to our friends in the animal kingdom, there are easier ways to get an omelet.

This week’s post is also about fighting over who reigns supreme. But this battle is between the FTC Franchise Rule and the ABC Test for determining independent contractor vs employee status. Sounds exciting? (I know!)

In Massachusetts, there is a strict ABC Test for determining employee status. This is the hardest ABC Test to meet in the US. It is the same as California‘s test but lacks the exceptions found in California law.

ABC Tests have been viewed in the business community as a threat to the franchising model of doing business. On one hard, franchisors must exert control over their franchisees to ensure brand consistency. On the other hand, exerting control is a sign of employment and could turn a franchisee into the franchisor’s employee.

In Patel v. 7-Eleven, the Massachusetts Supreme Judicial Court was asked whether the ABC Test can be used to determine employment status in a dispute between a franchisor and franchisee. The franchisor, 7-Eleven, argued that the state law test is incompatible with the FTC Franchise Rule and should therefore be disregarded in the franchise context.

The Court ruled that the ABC Test still applies, reversing the earlier decision I wrote about here, in this super fun but now outdated Electric Grandma-themed post.

The Court explained that the FTC Franchise Rule deals with control over the “method of operations,” not control over the method of “performing service”:

“[C]ontrol over the franchisee’s method of operation” does not require a franchisor to exercise “control and direction” in connection with the franchisee’s “performing any service” for the franchisor — the relevant inquiry under the first prong of the ABC test. That the election under the FTC Franchise Rule and the first prong of the ABC test employ the same word — control — does not create an inherent conflict. Indeed, “significant control” over a franchisee’s “method of operation” and “control and direction” of an individual’s “performance of services” are not necessarily coextensive.

I dissent. (Can I do that?)

The lines get awfully blurry awfully fast. The differences the Court relies on are subtle differences. In many respects, control over the operation seems to requires control over how services are performed. Your burger at one franchise looks and tastes the same as your burger at another franchise because the method for making that burger has to be essentially the same. It’s true that the franchisor doesn’t control a franchisee’s schedule or hiring process. But how well will a jury understand that the franchisor’s control is over the “operation,” but not over the “services”?

The Court’s ruling does not mean franchisees in Massachusetts are going to be considered employees now, but it does make it more challenging for a defendant/franchisor to explain the subtle distinctions in types of control.

I don’t know who in this scenario is the bobcat and who is the python, and I certainly don’t know who would be the one eating the eggs. But like the python vs. bobcat confrontation, there’s a definite clash here, and it’s an uncomfortable and confusing situation for everyone. The Massachusetts Supreme Court certainly didn’t do anything to make it easier to apply the ABC Test, and independent contractor misclassification remains a serious risk for franchisors who comply with franchising requirements.

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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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Long Songs: After 12 Years, Court Certifies Class in Independent Contractor Misclassification Dispute

I like long songs. For the last several weeks, I have been starting my workday with the Pink Floyd album Atom Heart Mother on my headphones. The opening track is 23 minutes, and the album ends with “Alan’s Psychedelic Breakfast,” a 13-minute journey that includes lines like “um, flakes” and “marmalade, I like marmalade.”

Long litigation, on the other hand – I’m not a fan. When I was an associate, I worked on a healthcare fraud case that lasted about 8 years. Not fun.

The legal team at Sleepy’s LLC probably doesn’t like long litigation either. Hargrove v. Sleepy’s LLC is an independent contractor misclassification case that was filed in 2010. The case has been to the Third Circuit twice already and went to the New Jersey Supreme Court on the certified question of what test should be used to determine employee status under New Jersey wage and hour law. I wrote about that 2015 ruling here in a post that also takes an admiring look at one menu option at an ice cream parlor in Dania Beach, Florida. (Partial spoiler: ABC Test. But you’ll have to read the post to see about the menu option.)

This case is back in the news after a new set of rulings.

After 12 years, the court issued a decision last week to grant class certification and to deny the defendant’s motions to dismiss. These are issues that are typically resolved in the first several months of a case.

The point here is to show you how long and complicated an independent contractor misclassification case can become. This is not straightforward litigation, and there are so many legal issues that can dominate the underlying dispute — questions, for example, about class certification, class size, jurisdiction, standing, and which legal test to use for deciding whether misclassification exists.

This case is a good reminder of the importance of getting your independent contractor arrangements reviewed and your contracts revised. Preventive steps taken now can help avoid lengthy litigation later. Lengthy litigation is no fun for anyone.

But I do like long songs, and if you pay close attention, you can appreciate the careful and elaborate construction of a track. Put on your headphones if you want to catch every subtle sound.

And marmalade. I like marmalade.

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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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Upside Down? U.S. Companies Can Learn from Australian High Court Ruling on Independent Contractors

Source: Hema Maps

There’s no reason our maps are oriented the way they are, with Australia at the bottom and Canada near the top. There’s no right side up in space, and we could just as easily think of the world with Australia on top, in the middle.

Same with our way of deciding Who Is My Employee? The process for determining whether someone is an employee or an independent contractor doesn’t have to be the way Americans conduct that analysis.

Two High Court decisions this month in Australia highlight a key difference between the American approach and what is now the new Australian approach.

In the U.S., courts look past the written contract and analyze a worker’s status based on the actual facts of the relationship.

The Australian High Court says the U.S. approach is upside down.

In two highly publicized decisions, the Australian court ruled that the contract establishes the rules of the relationship and therefore also determines the worker’s status. In one case, the agreement said the work would be controlled by the hiring party. By contractually reserving the right to control the work, the hiring party inadvertently made the worker an employee. The court still looked past the fact that the parties called the worker an independent contractor, but the court said the contractual requirements of the relationship — the terms and conditions — controlled the outcome.

The other High Court case involved two truck drivers. Their contracts exhaustively set forth terms preserving their flexibility to work for others and to control how their work was performed. Their contracts also called for the drivers to use their own equipment, which involved a significant investment by the drivers. The court overruled a lower court decision that deemed the workers to be employees. The lower court focused on actual control exerted by the hiring party. But the High Court said the contract controls and, in this case, the contract established requirements consistent with independent contractor status. It is up to the parties to follow the contract, but the contract establishes the independent contractor relationship.

There are lessons for American companies here too.

While under U.S. law, the actual facts of the relationship control whether the worker is an employee, the independent contractor agreement is an opportunity to memorialize the helpful facts. That’s why off-the-shelf templates in the U.S. are of no value. (Hot tip: Google & Bing is not a law firm.) See related posts here and here, including how to discomfit a bear.

An independent contractor agreement in the U.S. should be drafted with the particular facts of the relationship in mind. Does the worker get to decide when and where the work is done? If so, put that in the contract. The worker controls when and where the work is performed, and the hiring party has no right to control when and where.

If the worker’s status is challenged, you want the contract to be a helpful piece of evidence. You want to be able to say to a court: Not only does the worker get to decide when and where the work is done (or insert other factor), but the contract forbids us from controlling that.

In the U.S., contract terms like that will be persuasive evidence, but only if the actual facts align. In Australia, the contract sets the rules, and the parties are in breach if they fail to follow the rules established in the contract.

But no matter where you sit, and no matter which way your map is aligned, companies should view independent contractor agreements as an opportunity to build the case that an independent contractor is properly classified.

By planning ahead and drafting carefully, you can maximize your chances of coming out on top.

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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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Twilight Zone? AFL-CIO Says “Not Now,” as NLRB Considers Redo of Independent Contractor Test

Raise your hand if you remember the 1982 song “Twilight Zone”? Seeing several hands raised, I will continue. The tune is catchy, but the lyrics are hard to understand. I heard the song this weekend and decided to finally check the lyrics. “There’s a storm on the loose, zarmines in my head” couldn’t be right, could it?

Raise your hand if you knew the chorus was this:

Help I’m steppin’ into the twilight zone
The place is a madhouse,
Feels like being cloned
My beacon’s been moved under moon and star
Where am I to go, now that I’ve gone too far?

Seeing no hands raised, I will continue.

It’s all very confusing to me, but it made sense once I read through it more carefully.

I had the same reaction after seeing an amicus brief that the AFL-CIO recently filed with the NLRB. The brief was filed in a case that may — yet again — change the test for independent contractor status.

In Atlanta Opera, the Regional Director for Region 10 ruled that a proposed unit of makeup artists and hairstylists were employees, not independent contractors, and that an election could proceed.

The NLRB then issued a notice asking the parties and the public for briefs addressing whether the Board should reconsider the test for determining whether workers are independent contractors or employees. It seems inevitable that the Board will rewrite the test to make it harder for a worker to be deemed a contractor. But is Atlanta Opera the right case to use for rewriting the test?

The AFL-CIO, somewhat surprisingly, said no. Like the lyrics to “Twilight Zone,” that was confusing to me at first, but it makes sense when I read through it more carefully.

Undoubtedly the unions want a rewrite of the test to make it as hard as possible for someone to maintain contractor status. But the AFL-CIO urged the NLRB to wait, arguing this isn’t the right set of facts to make a sweeping change.

The AFL-CIO’s brief argued that, even under the existing test, it was pretty clear the makeup artists and stylists were employees. It would be more impactful to wait for a closer case to rewrite the test. Ah, so that’s their angle — wait til later then really shake things up.

Eventually, the NLRB is going to change the test. The current test, explained in SuperShuttle DFW (discussed here), examines ten Right to Control factors.

At a minimum, it seems clear that the Board would like to go back to the FedEx Home Delivery test. The FedEx test asked whether the worker was “in fact, rendering services as part of an independent business” and essentially adopted an Economic Realities Test, rather than the Right to Control Test that had always been applied.

When the Board revises the test, it could go back to FedEx or it could try to adopt a new, more stringent test, like an ABC Test. (The courts probably would not allow the Board to adopt an ABC Test without Congressional action, but that’s for another day.)

And the Board will revise the test. It’s just a question of when and to what. The Board will make it harder to be an independent contractor under federal labor law. That means it will become easier for unions to file election petitions and try to organize groups of workers that might now be operating as independent contractors.

Yeah there’s a storm on the loose, sirens in my head.

Oh. That makes more sense.

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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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Dole-Kemp ‘96? NLRB Announces Plan to Go Back to Old Rules on Joint Employment (But Not That Old)

The internet may be a playground and an encyclopedia, but it’s also a living graveyard. For those of you politically inspired, it’s not too late to join up with Dole-Kemp ‘96. Fans of the X-Files, who still await the next episode, can stay caught up at Inside the X. And anyone still looking to join the Heaven’s Gate cult can check out the group’s webpage here. The site is supposedly maintained by two of the only members who did not commit suicide in 1997, so leadership opportunities may be available.

The NLRB is hopping on the retro train too. Earlier this month, the Board announced its intent to adopt a new rule on joint employment. The new rule would displace the Trump-era regulation, which currently requires direct and substantial control over essential terms and conditions of employment before joint employment can be found.

The NLRB’s Notice of Proposed Rulemaking follows the trail blazed by the Wage and Hour Division (WHD) of the DOL, which in July rescinded the joint employment regulations passed during the Trump Administration. The WHD didn’t make a new rule; it just left a giant crater in the landscape, and now for Fair Labor Standards Act claims, there is no regulation at all.

The NLRB seems intent on adopting its own rule, not just rescinding the current regulation. There’s little doubt as to what the new rule will look like. Expect it to track the Browning-Ferris standard imposed by the Board in 2015. Under Browning-Ferris, when one company has the right to control aspects of the work, joint employment exists — regardless of whether control is actually exerted, and regardless of whether the control is over wages, hours, scheduling or anything else that fits within the meaning of essential terms and conditions.

Expect a substantial expansion in the scope of who a joint employer under the NLRA after the new rule is released. The impacts of joint employment under the NLRA can include being forced into bargaining with workers directly employed by a different company (a subcontractor, for example), being accused of a broader range of unfair labor practices, and being subjected to picketing that would be illegal secondary picketing if there were no joint employment relationship.

Back when Bob Dole was seeking the White House, actual control was required to be a joint employer under the NLRA. Since 2015, the standard has ping-ponged back and forth as the political winds have shifted. We’re about to see another major change sometime in mid-2022. If after the change you find yourself missing the good ol’ days, at least you can still cozy up with your Apple 2E and check out the Dole-Kemp campaign website.

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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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A Frog’s Eye View: What is Horizontal Joint Employment?

Suppose Kermit works 30 hours a week at The Muppet Show. He holds a non-exempt position as a research assistant, trying to determine why are there so many songs about rainbows.

Frog food is expensive these days, so he holds a second job too. Kermit works nights at Sesame Street, where he spends 20 hours a week investigating multi-colored arc-shaped atmospheric phenomena and what’s on the other side.

With 30 hours at one job and 20 hours at another, neither role pays Kermit overtime.

But is he being cheated out of time-and-a-half? Let’s hop in and take a deeper look.

Horizontal joint employment is when a person holds two jobs, but the businesses are under common control. They may have the same owners or officers, they may coordinate schedules among workers, or they may share a common pool of employees. When horizontal joint employment exists, the hours from both jobs are aggregated, and 30 hours at one job plus 20 hours at the other equals 50 total hours, 10 of which require overtime pay.

So what about our short-bodied, tailless amphibian friend? Does Kermie get overtime?

Kermit may seem like a free spirit, but whether he’s on The Muppet Show (30 hours) or Sesame Street (20 hours), his every move is controlled by Jim Henson. Literally.

Common control signals horizontal joint employment, which means Kermit’s been shortchanged 10 hours of overtime. It’s not easy being green.

You’ve probably read about recent changes to the joint employment tests, but those changes are for vertical joint employment, not horizontal joint employment. Vertical joint employment is when the employees of a primary employer perform services for the benefit of a secondary employer, like in a staffing agency relationship. When staffing agency employees work side-by-side with a company’s regular employees, the staffing agency and the other business may be joint employers.

The rules on horizontal joint employment are unchanged. So if sharing employees with a business under common control, be aware of the rules and look before you leap.

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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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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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