Independent Contractors, Joint Employers and the Unintended Employment Relationship

Transcription

1 Independent Contractors, Joint Employers and the Unintended Employment Relationship March 31, 2017

2 Presented By Jessica Travers Shareholder Littler Miami

3 Agenda What are Independent contractors? What are the risks associated with using independent contractor? What is joint employment How has the law developed to address these arrangements? How to avoid creating an unintended employment relationship

4 What is an Independent Contractor? People who contract to perform services for others, but who do not have the legal status of employees. Freelancers, consultants, self-employed, etc.

5 What are the Benefits of Hiring Independent Contractors? Save money ($$) Payroll taxes Insurance Premiums Benefits (health insurance) Workers comp

6 What are the Benefits of Hiring Independent Contractors? Flexibility Hire the IC for a specific, specialized task No training necessary

7 What are the Risks for Misclassifying Workers as Independent Contractors? Claims for back taxes Income taxes payable by employee FICA taxes FUTA payment taxes Penalties for not filing a W-2 Penalties on unpaid taxes Penalties for each Social Security number not obtained Interest on unpaid taxes Potential fraud, negligence or other fines ACA: potential penalties of $2,000 per employee, assuming reclassified workers result in less that minimum coverage (95% of FT employees) State unemployment taxes Misclassification claims under laws reserved for employees FLSA claims being some of the most common lawsuits

8 Independent Contracting Under Attack Misclassified employees are often denied access to the critical benefits and protections they are entitled. Misclassification also generates substantial losses to the federal government and state governments in the form of lower tax revenues, as well as to state unemployment insurance and workers compensation funds. -- DOL Blog, July 15, 2015

9 Critical Benefits & Protections Taxes Union Membership Workers Comp Other Benefits Affordable Care Act Unemployme nt Insurance Family & Medical Leave Overtime

10 Substantial Losses in Revenue Loss of tax revenue Studies estimate that the federal government loses between $2.7 to $4.3 billion annually State studies have shown losses of employment, unemployment and workers compensation taxes/premiums UI Losses WC Losses State Taxes CA $194 million OH $100 million $510 million $248 million IL $54 million $98 million $207 million MA $35 million $91 million $152 million

11 Pressure From All Sides Federal agencies, state agencies, unions and other employee advocates focused on stopping wage theft DOL States Agencies IRS A Perfect Storm Unions

12 The IC Compliance Challenge: Too Many Rules IRS 20- Factor Test Darden Common Law Test State Law ABC Tests FLSA Economic Reality Test NLRB FedEx Test Federal law alone has up to four different tests for IC status Layered on top of these, states often have different tests for different laws

13 DOL s #1 Enforcement Priority: The Misclassification Initiative Directed investigations in industries DOL views as frequently misclassifying employees as ICs In FY % of investigations were directed (as opposed to responding to a complaint) DOL collected $79 million in back wages Child Care Construction Home Health Care Janitorial Landscaping Poultry and Meat Processing Professional and Personnel Services Transportation and Warehousing

14 Agreements with State Agencies DOL has agreements to share information with the IRS and 28 states

15 New DOL Guidance on Independent Contractors

16 Most Workers are Employees In sum, most workers are employees under the FLSA s broad definitions. The very broad definition of employment under the FLSA as to suffer or permit to work and the Act s intended expansive coverage for workers must be considered when applying the economic realities factors to determine whether a worker is an employee or an independent contractor.

17 Economic Reality Test Under the FLSA, an individual is an employee if, as a matter of economic reality, an individual is dependent on the alleged employer In contrast, independent contractors have economic independence and operate a business of their own 1. Integration 2. Profit and Loss 3. Investment 4. Skill and Initiative 5. Length of the Relationship 6. Control

18 DOL Guidance Integration Is the work an integral part of the employer s business? If the work performed by a worker is integral to the employer s business, it is more likely that the worker is economically dependent on the employer Work performed by cake decorators is obviously integral to the business of selling cakes which are custom decorated Picking the pickles is integral to the pickle business A worker answering calls at a call center along with hundreds of others is performing work integral to the call center s business

19 DOL Guidance Profit or Loss Does the worker s managerial skill affect the worker s opportunity for profit or loss? An IC s decisions should reflect managerial skills that will affect his or her opportunity for profit or loss beyond a current job On the other hand, the worker s ability to work more hours does little to separate employees from independent contractors Doing one s job well or being technically proficient is unrelated to an individual s ability to earn or lose profit

20 DOL Guidance Investment How does the worker s relative investment compare to the employer s investment? An independent contractor typically makes investments that support a business as a business beyond any particular job The worker s investment should not be relatively minor compared with that of the employer Investing in tools and equipment is not necessarily a business investment that indicates that the worker is an independent contractor

21 DOL Guidance Skill and Initiative Does the work performed require special skill and initiative? A worker s business skills, judgment, and initiative, not his or her technical skills, count most The fact that workers are skilled is not itself indicative of independent contractor status The technical skills of cable installers, carpenters, etc., are not themselves indicative of any independence or business initiative

22 DOL Guidance Length of Relationship Is the relationship between the worker and the employer permanent or indefinite? Permanency or indefiniteness in the relationship with the company suggests that the worker is an employee An independent contractor typically works one project for a company and does not work continuously or repeatedly However, a lack of permanence or indefiniteness does not automatically suggest an IC relationship

23 DOL Guidance Control What is the nature and degree of the employer s control over the work? The worker must control meaningful aspects of the work The control must be actual, not just theoretical Exercising control due to regulatory or customer requirements still indicates employee status The FLSA covers workers even if the employer does not exercise control if the workers are economically dependent on the employer

24 What Is New? The worker s investment should not be relatively minor compared with that of the employer The fact that workers are skilled is not itself indicative of independent contractor status A lack of permanence or indefiniteness does not automatically suggest an IC relationship The control factor should not play an oversized role in the analysis. The FLSA covers workers even if the employer does not exercise control if the workers are economically dependent on the employer

25 What Can Employers Do? 1. Never engage a former employee as an IC? 2. Never engage an IC who was an employee anywhere within the last 18 months? 3. Never be an IC s first customer? 4. Never engage an IC to perform the same work as employees? 5. Never prohibit an IC from working for other companies? 6. Never provide training to an IC? 7. Never attempt to control how, where or when work is performed? 8. Never provide tools or equipment? 9. Never reimburse for business expenses? 10. Never convert an IC to an employee?

26 What Can We Do to Put Ourselves in the Best Position to Prove That the Person I Hired Really is an IC? Conduct a self-audit using the criteria identified above Sign a written IC agreement Have the IC complete a questionnaire designed to elicit information showing that the IC is really running an independent business Require the IC to give you documents that will help prove he/she is an IC

27 Key Provisions for Independent Contractor Agreement Scope of work/description of Services No rights to benefits Term and termination Consideration Contractor representations Independent contractor status Confidentiality Conflict of interest Insurance requirements Liability/indemnification Arbitration

28 Reviewing the Independent Contractor Agreement Are you really following it? If not, it will be ignored for purposes of determining status The most important part is the description of services Is it well written and an accurate reflection of what services are to be performed Does it really need to contain all of the sections that are in it?

29 Five Golden Rules Never engage a former employee as a contractor Never be a contractor s first customer Never engage someone as a contractor who is/has been employed anywhere within the last 18 months Never engage someone as a contractor who will do the same work/under similar conditions as employees Never convert a contractor to an employee

30 JOINT EMPLOYMENT

31 Before Browning Ferris A Predictable Test Businesses are joint employers only when they share direct and immediate control over matters governing the essential terms and conditions of employment Focus is on terms and conditions of employment including hiring, firing, discipline, supervision and direction

32 After Browning Ferris An Ambiguous Test Two part test that looks at direct, indirect, potential, and ultimate control The initial inquiry is whether there is a common law employment relationship with the employees in question If this relationship exists, then the question is whether the putative joint employer possesses sufficient control over employees essential terms and conditions of employment to permit meaningful collective bargaining Fact based test that must be decided on case-bycase basis

33 What Does It Mean For Businesses? Dissenting Opinion Browning Ferris fundamentally alters the law applicable to all business-to-business relationships Landlords Parent/Subs Subcontractors Franchises Successors Creditors Consumers Suppliers

34 What Does It Mean For Businesses? Majority Opinion Other business-tobusiness relationships are not before us today but that its new control factors will have to be examined on a case by case basis, leaving the door wide open Landlords Parent/Subs Subcontractors Franchises Successors Creditors Consumers Suppliers

35 Other Recent Joint Employer Cases McDonald s NLRB complaints were filed under the old joint employer standard; case remains pending Freshii/Nutritionality NLRB GC 2015 Advice Memo found no joint employer status under the old standard, and even if the standard were to change 34

36 Other Recent Joint Employer Cases CNN While relying on the Board s traditional joint employer standards, the majority found that CNN indirectly controlled the hiring, supervision, and direction of the subcontractor s employees ACECO Local Littler case in which we convinced the Regional Director that the company was not a JE 35

37 So What Has Changed? Not only does the Browning Ferris case speak of indirect control, but also ultimate control and potential authority reserved by contract, even where never exercised Such a standard is potentially unlimited in its scope The new standard applies to all pending and future cases Bad news, and deep uncertainty, for all business-tobusiness relationships

38 Can You Take Steps To Avoid The New Standard In Your Organization? Take the Board at its word: Keep your operations as different from Browning Ferris as possible Remove control and standards language from your contracts and daily practices The challenge of balancing practical business needs against the increased risks of joint employer status Worth making common sense changes where possible, but no guarantee of success 37

39 What Else Can Businesses Do? Educate yourself on the NLRB s new joint employer standard and monitor latest directives provided by the agency Audit current relationships with third parties to eliminate factors showing potential or indirect control, where possible Review outsourcing contracts upstream and downstream Determine whether the benefits of arrangement (franchise model, use of staffing firm, leasing, outsourcing of entire functions, etc.) are worth potential risks Recognize that agreements and approaches must be tailored to the particular arrangement and context Accept that entering into arrangements means reducing or ceding control; not possible to avoid all control, but aim to keep control to a minimum

40 What Else Can Businesses Do? Weigh benefits of arrangement and Joint ER risk Choose vendors carefully (solvency/competency) Insist staffing agency/labor provider be W-2 employer Reduce reserved control in agreements Reduce actual control on the ground Indemnity clauses Avoid contracting for same work /side-by-side arrangements Limit duration of arrangement Obtain representations and warranties regarding legal compliance 39

41 Negate Indicia of Control Include disclaimer language: end-user and supplier are not joint employers supplier is independent contractor, sole employer of the workers in question and solely responsible for wages, benefits (e.g., health insurance, workers compensation), etc. of supplier s workers Provide that supplier has right to control the workers with sole right and obligation to provide and exercise supervision Provide that end-user shall not participate in hiring, firing, promotion, demotion or disciplinary decisions of supplier s employees

42 Negate Indicia of Control Continued Include fee structure for services rendered not based on wage rates and hours of work rendered by nonemployees i.e., use alternatives to cost plus pricing if feasible Where minimum standards of performance are deemed necessary, frame as recommendations Where standards must be mandatory, include language that describes their relationship to a legal requirement or need (e.g., franchisor) to protect a trade name, professional methods, goodwill or commercial image

43 Indemnities and Insurance Review insurance policies to determine whether liability for joint employees is covered Provide for indemnification (and/or EPLI) to cover breaches of reps and warranties and/or behavior that results in joint employer liability

44 Operational Guidelines Assess in advance any unique management challenges associated with using contract workers Adhere to separation of responsibilities and functions between end-user and supplier i.e., end-user should not function as employer, directly or indirectly Train end-user s supervisors on limits of control and interactions with contract workers

45 If You Must Convert Best time to convert is January and W-2 in same year is red flag to IRS Let contracts expire and do not renew them Wait until next calendar year to hire Better to hire new person altogether Make business decision about tax reporting

46 Questions? Jessica Travers Shareholder Littler Miami

47 Supplier s Sole Responsibilities Recruiting, screening, hiring and referring employees Paying wages, providing insurance and benefits, withholding social security, taxes and other required withholdings Suspending or laying-off, recalling or promoting employees Adjusting grievances and dealing with any union who represents contract workers Conducting any necessary training and orientation End-user should not do any of the above, and should deal directly with the contractor rather than workers

48 Conduct Periodic Reality Checks Periodically review how arrangement is working in practice and take steps to restructure to eliminate or reduce discovered joint employer risks Ensure that your managers/supervisors contact with supplier s non-management is limited Dealings should be with contractor/franchisee or their supervisory personnel; directives should not be issued to their employees

49 This information provided by Littler is not a substitute for experienced legal counsel and does not provide legal advice or attempt to address the numerous factual issues that inevitably arise in any employment-related dispute. Although this information attempts to cover some major recent developments, it is not all-inclusive, and the current status of any decision or principle of law should be verified by counsel.