February 8, 2016

Dan Handman Speaks to the Daily Journal on the Subject of “What Is An Employee?”


HK’s Dan Handman spoke to the Daily Journal regarding the definition of an employee.

The text of the article is below.

Lack of clarity over ’employee’ definition

The question could not be more basic: What is an employee? Surprisingly (or not, depending on who you ask), Congress made no effort to set the contours of what constitutes an “employee” in many of the laws governing the workplace. For example, the federal Fair Labor Standards Act, which requires the payment of a minimum wage and overtime to certain employees, defines an “employee” as “any individual employed by an employer.” If that circular definition weren’t enough, the New Deal-era law goes on to define the word “employ” as “to suffer or permit to work,” bringing to mind the Dickensian sweatshops from the turn of the century that led to labor unrest and to the FLSA’s enactment. These confusing definitions have resulted in countless lawsuits with regard to independent contractors and so-called “joint employers,” where more than one entity is considered to employ an individual.

Of late, the Department of Labor, which is charged with enforcing the FLSA, has been very active in the last year in trying to fill these gaping holes in the law. In July 2015, the department issued an administrator’s interpretation, in which it opined that the FLSA was intended to apply “very broadly” (the word broad appears 18 times in the document) when it comes to independent contractors and that it believes that most American workers are employees.

On Jan. 20, in what many employment lawyers saw as a shot across the bow to employers in certain industries, the department issued another AI, this time on the issue of joint employers. While the department made it clear that this AI applied “in all industries,” it set its sights on a few in particular, namely the construction, agricultural, janitorial, warehouse and logistics, staffing and hospitality industries. Those industries have been particularly hard hit by joint employer claims.

The issue is this: Historically, the doctrine of joint employment arose in what the department calls cases of “horizontal” employer relationships. Those commonly arose under alter ego-like theories – when two employers are so integrated in their operations that they can legally be found to be one employer. But, with a changing American economy, the issue has now largely become one focused on what the department terms “vertical” integration between employers, that is when an employer has contracted with another employer to allow individuals to provide it with labor.

In the Jan. 20 AI, the department argued that when there is vertical integration between two employers, the question must be whether the “economic realities” of the relationship between the worker and a company dictate that he be considered an employee of both. Indeed, the department had adopted the “economic realities” test in the July 2015 AI dealing with independent contractors, so it caught few by surprise and was echoed by this AI’s statement that “the concept of joint employment, like employment generally, should be defined expansively under the FLSA.”

In the end, the department laid out seven factors which it believes should be used to determine whether a second employer, as a matter of “economic reality,” should be considered a joint employer for purposes of the FLSA. First, the extent to which the joint employer “directs, controls or supervises” an employee: With more control, it becomes more likely that a second employer is a joint employer. Second, the degree of control over hire/fire decisions and rate or method of pay: Again, with more control, a second employer is more likely to be a joint employer. Third, the permanency of the relationship: The more permanent, the more likely a second employer is a joint employer. Fourth, the degree of skill required: the less skill required for work, the more likely a second employer is a joint employer. Fifth, how integral an employee’s work is to an employer: The more integral, the more likely a second employer is a joint employer. Sixth, whether work is done on the employer’s premises: If work is done onsite, it is the more likely a second employer is a joint employer. And, seventh, whether the employer performs administrative functions commonly performed by employers: Again, the more control, the more likely a second employer is a joint employer.

Because the department did not go through the notice and comment process required under the Administrative Procedures Act, the AI represents merely the department’s opinion of the under the Obama administration. As a practical matter, it can be changed at any time, especially under a different secretary of labor.

And indeed, there is reason to think that another administration may depart from this broad standard. The current regulations allow for joint employment in one of only three circumstances: (1) two employers agree to share the employee’s services (i.e., the horizontal relationship); (2) one employer acts “directly or indirectly in the interest of the other employer in relation to the employee”; and (3) two employers are not completely disassociated with respect to the employment of a particular employee and may be deemed to share control of the employee, directly or indirectly, by reason of the fact that one employer controls, is controlled by, or is under common control with the other employer. See, e.g., 29 C.F.R. Section791.2(b).

Ultimately, of course, this AI is subject to review and reversal by the court. Indeed, many employment lawyers think that is likely to happen. But in the meantime, this AI remains the department’s official position, at least until January 2017 when a new president will take office.

So, who should be paying attention to this AI? First and foremost, any employer who uses staffed employees should consider itself on notice that the department has their sights set on them. In addition, the department is likely to focus on employers that are a part of franchises. Recently, for example, the National Labor Relations Board found that McDonald’s, as a franchisor, was jointly liable for any unfair labor practices committed by its franchisees. Few employment lawyers question that the department would find the same.

And what should an employer do if the department is targeting it as a joint employer? That company should not operate under the belief that it will be insulated from liability because its employees are provided by a staffing company. Both the staffing company and the end user will be jointly liable for ensuring that employees are being paid properly. Under the FLSA, that means that employees are being paid at least the minimum wage and that nonexempt employees are being paid overtime consistent with the law.

Originally published in the Los Angeles/San Francisco Daily Journal, February, 2, 2016. Copyright 2016 Daily Journal Corporation, reprinted with permission.

Daniel H. Handman is a partner with Hirschfeld Kraemer LLP, based in the firm’s Los Angeles office. You can reach him at DHandman@hkemploymentlaw.com.