- March 2016
As the American and global economies evolve via new technologies, fissured workplaces and varied organizational and staffing models, formerly straightforward questions like “Who are my employees?” and “Who is my employer?” have become more complex. “Gig” economy companies like Uber, third-party management companies, and staffing companies now dot the economic landscape, creating greater arm’s-length relationships with workers, which have generated legal gray areas in the traditional employment relationship.
The Department of Labor (“DOL”) recently provided guidance as to: (1) when a worker is an independent contractor vs. employee; and (2) when an employee has “joint” employers. Understanding these distinctions is essential in every business; employers need to know when their company becomes accountable for violations of employment laws, including the Fair Labor Standards Act (“FLSA”) and state law equivalents governing the payment of wages and overtime.
Independent Contractor vs. Employee
In order for the FLSA’s minimum wage and overtime provisions to apply to a worker, the worker must be an “employee,” broadly defined to include to “suffer or permit to work.” Generally speaking, employees are economically dependent on the business of the employer, while independent contractors are workers with economic independence in business for themselves.
The DOL has identified several “economic realities” as factors to help establish a baseline determination of when an employment relationship is created, including: (1) the extent to which the work performed is an integral part of the employer’s business; (2) whether the worker’s managerial skills affect his or her opportunity for profit and loss; (3) the relative investments in facilities and equipment by the worker and the employer; (4) the worker’s skill and initiative; (5) the permanency of the worker’s relationship with the employer; and (6) the nature and degree of control by the employer. The Supreme Court has indicated that no single factor is determinative here. Moreover, it is the nature of the relationship, and not how the relationship is defined in any employment contract, that is the true determinant.
The DOL has also weighed in on who constitutes an “employer.” Increasingly, business models and labor arrangements result in an employee being employed by two or more employers. The DOL has noted that the FLSA defines both employment and joint employment “expansively.”
Joint employment may exist when two or more employers each separately employ an employee and are sufficiently associated with or related to each other with respect to the employee. A waitress working for two separate restaurants sharing common economic ties is an example. Often the employee will perform separate work or work different hours for each employer. This is referred to as horizontal joint employment.
Joint employment may also exist when an employee of one employer is, with regard to the work performed, economically dependent on another employer. For example, a nurse who works for a staffing agency that is placed at a hospital. In determining whether sufficient dependency exists, courts again consider “economic realities” factors like control of the work performed, employment conditions, permanency of the relationship, and whether the work is integral to the business and performed on its premises. This is referred to as vertical joint employment. Vertical joint employers often share operations.
Industries where some form of joint employment is common include home health care agencies, construction, agriculture, hospitality, and warehousing and logistics.
Employers Should Exercise Caution
Understanding the employee/employer relationship is the first step toward properly managing a workforce. The complexity of the modern economy dictates that careful consideration be given to what used to be a simple analysis. As the push to protect misclassified workers continues, erring on the side of caution and/or consulting an attorney can help your business avoid unnecessary legal liability.
If you have questions or would like to discuss your company’s employment structure, please contact Alex Marks at 312/840-7022 or email@example.com.