In Contract Labor Agreements, This Simple Clause Can Be Your Pillow

Joint employment contract clauseFor humans, some things are essential. Like a good pillow. For non-humans, the anti pillow sometimes works too. Not sure how. But the non-human in this picture generally sleeps like this.

For businesses contracting for labor, some things are essential too. One clause you are likely to have in contract with a supplier of labor is the right to remove a bad apple from the project.

The bad apple clause typically reads something like this: “We have the right to remove any individual supplied by contractor from the project for any reason at any time.”

That’s useful, but does it create an argument that your business is taking control over the individual’s employment in a way that could make your business an employer (or joint employer) of an individual you remove?

Here’s a simple fix to improve your contracts and limit the viability of that argument:

“We have the right to remove any individual supplied by contractor from the project for any reason at any time. We do not, however, have any right to control the individual’s employment status with contractor. Contractor retains the sole right to make all decisions regarding the hiring, termination, and other conditions of employment for all individuals assigned to the project or removed from the project.”

Consider the addition of that extra sentence or two to be a fluffy pillow.  It will help you sleep better if faced with a misclassification or joint employment claim.

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

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The Monster with Three Eyes Can Help You Avoid Claims of Joint Employment

Some monsters are scary. There’s Godzilla, who terrorized Tokyo and whose name in Japanese translates roughly to gorilla-whale. (Thanks, wikipedia!) There’s Frankenstein’s monster, Dracula (also Count Chocula), and the Creature from the Black Lagoon, which was filmed in terrorizingly implausible black and white 3-D.

But on the other hand, some monsters are friendly and educational, like Cookie Monster, E.T., or, dare I say, Elmo. (“Kids look at these crayons… Kids look at these crayons.”)

This post is about a friendly and educational monster: The Monster with Three Eyes.

If you want to help your business avoid claims of joint employment, remember the Monster with Three Eyes when drafting contracts with staffing agencies or other vendors that supply labor.

Confession: The “three eyes” really should be the letter I three times, but when I try to write that out, it looks like “three is,” which is neither memorable nor a suitable name for a monster, even a friendly and educational one. So we go with three eyes. When I say it aloud — making sure first that no one is listening because why would a person say something like that aloud for seemingly no reason? — it sounds the same.

Here are the three main ingredients you’ll want to include in each contract with a vendor that supplies labor:

1. Identify the sole responsibilities of the vendor with respect to its employees. List these responsibilities. List the various obligations of an employer — things like properly recording all hours worked, paying overtime, paying a minimum wage, handling payroll, reimbursing expenses, providing meal and rest breaks, stuff like that. List these responsibilities specifically in the contract. Don’t just say the agency agrees it is the sole employer. Remember, joint employment is a legal doctrine that holds your business responsible if the vendor failed to do something it’s supposed to do. If your found to be legally liable, you want to be able to point to a specific contractual obligation the vendor failed to satisfy.

2. Indemnify. The indemnification provision needs specificity. It should require the vendor to indemnify your business for any claims of joint employment and for any claims arising out of the vendor failing to comply with any of its contractual obligations. That’s why you’re listing the specific contractual obligations of the vendor. When seeking indemnification, you want to be able to point to a specific contractual obligation the vendor failed to meet, which triggers the indemnification requirement.

3. Insure. Insurance requirements are just as important as indemnity. The indemnity clause is of no value if the vendor goes out of business or is liable for more than it can pay. Vendors who supply labor should be able to demonstrate that they have sufficient insurance so that if there is a joint employment claim and your business seeks indemnity, someone (the insurer) has the ability to pay.

Because joint employment is a legal doctrine that can hold your business fully liable for the misdeeds of a vendor, the key to limiting your business’s exposure is a carefully drafted contract. Even if your business is jointly liable under the law, you want to have a contractual claim against the vendor that failed to do what it was supposed to do, along with indemnity and insurance so that your business can be made whole.

So remember the Monster with Three Eyes when drafting or reviewing your next contract with a vendor that is providing laborers. If the vendor fails to meet its legal obligations, a contract drafted with these lessons in mind will be the gorilla-whale you need to get out of paying for the vendor’s mistakes.

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

Need training on avoiding independent contractor misclassification claims? Hey, I do that!  

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How Do I Run a Background Check on an Independent Contractor?

How do i run a background check on an independent contractorAfter the events of this past weekend, I don’t have to say anything about the risks involved in allowing dangerous people onto your premises. Before retaining an independent contractor who will have access to your business’s facilities, people, or information, it makes sense to know who you are inviting into your house.

An employment-style background check is often appropriate, but there are a few important differences between background checks being run before hiring an employee and before engaging a non-employee contractor.  [We’re talking here about 1099 contractors, not staffing agency employees.]

If the background check is being run by a third party, then the federal Fair Credit Reporting Act (FCRA) is likely to apply. But the rules are different for pre-employment background checks and non-employment background checks.

For pre-employment background checks, certain disclosures must be made before the background check is obtained, and additional disclosures have to be made before you take an “adverse action” based on the result of the background check, such as revoking a conditional offer or not hiring someone. These additional requirements apply only for background checks being run “for employment purposes.”

Ok, Todd. These don’t sound too burdensome. Can’t I just follow the more burdensome pre-employment rules just to be safe?

Yes, sort of. But a few words of caution are in order.

First, your User Agreement with the background check company requires you to certify to the background check company the purposes for which you will be requesting background checks. Review your agreement to see whether you certified that you would only run background checks “for employment purposes.” 

Since this is not a background check being run “for employment purposes,” you need to have another permissible purpose under the FCRA. The law lists several alternatives. Two are likely to apply:  You may obtain a background check (1) “in accordance with the written instructions of the consumer” or (2) if you have “a legitimate business need for the information in connection with a business transaction that is initiated by the consumer.” Here, the “consumer” would be the individual contractor.

You may need to amend your agreement with the background check company before  you run any background checks on potential independent contractors. You never want independent contractors to be considered your employees.

Second, check the federal forms you give to the individual before you run the background check. You do not want to give an independent contractor a Disclosure form or an Authorization form that says your company will run a background check “for employment purposes.” Many generic forms include that phrase because it’s a term of art used in the FCRA. For background checks being run on independent contractors, you don’t want to have the contractor sign a document that can be used to argue you were creating an employment relationship, rather than an independent contractor relationship.

Finally, check the state law forms you are using. If your background check company supplied you with a suite of forms, those forms likely include various disclosures required under state laws. States with additional pre-employment background check requirements include California, Minnesota, New Jersey, New York, Oklahoma, and Washington State, among others. Almost all of the required state law disclosures, however, apply only to background checks being run “for employment purposes.” Be careful not to use forms with language that could be used to argue you were creating an employment relationship, rather than a contractor relationship.

Final thoughts:  Running a background check on an independent contractor can be a good idea and can bring you and your business some piece of mind. Be careful, though, that you don’t solve one problem by inadvertently creating another.

Background check pitfalls can be prevented if you use the correct forms and documents ahead of time. It’s not that hard to do this correctly, but it requires a some extra attention and care.

If you’d like more information, you can review two earlier blog posts I’ve written on this topic, here and here. Or feel free to contact me directly at tlebowitz@bakerlaw.com.

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

Need training on avoiding independent contractor misclassification claims? Hey, I do that!  

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Meatloaf Lyrics Inspire Supreme Court; Arbitration Agreements Can Be Implied to Include Class Action Waivers

Meatloaf Lamps Plus Arbitration agreements independent contractorhttps://youtu.be/_wO8toxinoc

Meatloaf’s “You Took the Words Right Out of My Mouth” opens with a dialogue by Jim Steinman, who wrote the song, and actress Marcia McClain, who played Dee Stewart in the soap opera As the World Turns. He asks, “On a hot summer night, would you offer your throat to the wolf with the red roses?”

For a quick trip back to 1978-79, listen to the album version, not the shortened single, which cut out the dialogue, presumably because it distracted the roller skaters. The song is about teenage lovers and passion, and the lyrics are rich with intense imagery.

Offering a new twist on this old classic, the Supreme Court last week issued a ruling on arbitration agreements that can be paraphrased as “You took the words right out of the air because they weren’t in my arbitration agreement.” This decision will inflame passions in the pro-worker camp, but it’s a good decision for businesses. The case is called Lamps Plus v. Varela.

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The Stones, the Dalai Lama, and Arbitration: How Not to Get What You Need in an Arbitration Agreement

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Not Mick Jagger

You can’t always get what you want, said a wise English sage in 1969. This advice still holds true. For example, Chinese Foreign Ministry spokesman Lu Kang recently declared that the reincarnation of the Dalai Lama must comply with Chinese law.  Good luck with that.

The enforcement mechanism for Lu’s edict is unclear, but the Chinese Communist Party knows what it wants. (Allow me a brief diversion. My favorite sentence in the cnn.com story: “It isn’t completely clear whether the Dalai Lama will allow himself to be reincarnated after he dies.”  You and me both, brother!)

Another example arose in a recent court case, in which a messenger service required its independent contractor messengers to sign an arbitration agreement. Like spokesman Lu, the messenger service may have demanded a bit too much. A California Court of Appeal declared the arbitration agreement invalid, ruling that it was both procedural and substantively unconscionable.

What makes an arbitration agreement so one-sided that it’s unconscionable?

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Do Pre-Employment Laws Apply When Running Background Checks on Independent Contractors? (Tip: Instead, Just Ask Edward)

Time traveller independent contractor background check requirements

A time traveler named “Edward” claims to have photographic proof that he is visiting from 5,000 years in the future. According to Metro UK, he described his experience as “unbelievable.” Ponder that.

One of the benefits of time travel is that you’d know if your workers are going commit crimes in the future that could jeopardize your company. With people like Edward in short supply, we are instead forced to try to predict future behavior through more widely accepted methods, like reading tarot cards or performing background checks. (Free tip: pick the latter.)

There are federal and state laws that strictly regulate the processes and procedures for running pre-employment background checks. A Ninth Circuit Court of Appeals decision last week highlights the importance of following all technical requirements, including that employers provide a “clear and conspicuous disclosure” that they may run a background check and that the disclosure is “in a document that consists solely of the disclosure.” In that decision, the court ruled that it’s illegal to provide a disclosure that includes state law disclosures on the same page as the federal disclosure. It is common for employers to combine these disclosures on the same form, so check your forms! I blogged about the ruling here, on BakerHostetler’s Employment Class Action blog.

In contrast, the rules for running background checks on independent contractors are not as strict. The federal law requiring a stand alone disclosure applies only to reports being run “for employment purposes.” Same thing for the pre-adverse action notification requirement. It applies only to reports that are run “for employment purposes.”

Interpreting the “for employment purposes” language, at least three federal courts have ruled that a report on a prospective independent contractor is not being run “for employment purposes” and, therefore, these requirements do not apply to reports being run on independent contractors. (The FTC has issued guidance that the “for employment purposes” requirements do apply to independent contractors, but the courts have so far rejected this guidance as being inconsistent with the language of the statute.)

Some of the requirements in the Fair Credit Reporting Act (FCRA) may still apply, depending on the purpose of the report, but the bottom line is that the rules are different for background checks being run on employees and independent contractors. The FCRA is somewhat complicated, and don’t forget the patchwork of state laws.

There’s also the risk of misclassification — that the independent contractor could be deemed an employee — in which case the FCRA and state law requirements for pre-employment background checks would need to be followed, and the failure to follow them can be costly. The FCRA allows for statutory damages of $100 to $1,000 per violation, plus attorneys’ fees.

So if you’re afraid of a misclassification claim should you just follow the “for employment purposes” requirements anyway? Not necessarily. Though it can be prudent to follow some of the technical disclosure and pre-adverse action requirements that apply to pre-employment checks, be careful about using any forms with independent contractors that say the background check is being run “for employment purposes.” In other words, the forms you are using for pre-employment background checks might not be suitable for use with independent contractors.

This earlier blog post discusses more of the issues (and potential risks) related to running background checks on independent contractors.

There are plenty of good reasons to run background checks on some types of contractors, particularly those who will be entering customers’ homes. The goal, of course, is to try to predict the risk of future wrongdoing. Background checks can be useful for that purpose.

But the only surefire way to know what is going to happen in the future is to ask Edward.

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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After Supreme Court Ruling, Be Sure Your Arbitration Agreements Contain These Two Essential Clauses!

Hyena supreme court henry schein arbitration

I never thought hyenas essential
They’re crude and unspeakably plain
But maybe they’ve a glimmer of potential
If allied to my vision and brain

– “Be Prepared,” The Lion King

The song goes on to warn that “you can’t be caught unawares.” Be prepared. The song neglects to remind companies to check their arbitration agreements for two essential clauses, but that’s why you have me.

The Supreme Court delivered its first Kavanaugh-authored opinion late last week. It was a short, punchy, and unanimous decision with no mention of cartoon hyenas or warthogs, but it clarifies an important point under federal arbitration law: If an agreement calls for disputes to be resolved by an arbitrator, a court cannot override that contractual agreement — even to decide a threshold question like whether the dispute is subject to arbitration.

This is a case of Who decides who decides.

Many arbitration agreements contain carve-outs, saying that certain types of disputes are not subject to arbitration. A common carve-out allows parties to go to court to get an injunction to prevent imminent harm.

The issue here was whether a carve-out like that could be presumed by the court (since it was not explicitly in the agreement), or whether the arbitrator had to decide what was subject to arbitration. The court ruled:

When the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.

How does this apply to you?  Two important points:

First, carve-outs: Your arbitration agreements should be drafted to include carve-outs that allow parties to go to court to seek injunctive relief to prevent imminent harm. Specific types of disputes should not be subject to arbitration. If your employee or contractor is about to reveal a trade secret, you need the ability to run to court and get immediate relief. Arbitration is too slow to prevent that danger.

Second, arbitrability: If you fear that a court might invalidate the arbitration agreement or attempt to override it, include a provision like this: “Any disputes regarding whether an issue is subject to arbitration shall be resolved by the arbitrator.”

This case was decided under the Federal Arbitration Act, which is the federal law that favors enforcement of agreements to arbitrate disputes, subject to a few limited exceptions. One of those exceptions is also now before the Supreme Court in New Prime v. Olivieri, a case we discussed here. It relates to independent contractors in the transportation industry and whether the Federal Arbitration Agreement applies. A decision in New Prime will be issued sometime this term.

Arbitration agreements are an important tool that should be in your toolbox, especially if your company is concerned about class action claims, either from employees or independent contractors.

Be prepared.

For more information on joint employment, gig economy issues, and other labor and employment developments to watch in 2019, join me in Orlando on Jan. 24, 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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