the expanding definition of “employer”/media/files/insights... · the expanding definition of...

The Expanding Definition of

“Employer”

Michael SheehanAnne PachciarekTim Brennan

May 19, 2015

Contact Information

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Tim BrennanDLA Piper - [email protected]

Michael SheehanPartner – DLA [email protected]

Anne PachciarekPartner – DLA [email protected]

Historically, joint employment occurred when separate business entities simultaneously share control and supervision of a worker.

Control

and

Supervision

Control

and

Supervision

The Expanding Definition of “Employer”

Now, the historical test of direct and actual control is being altered in the US.

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The Department of Labor, NLRB, and the EEOC now propose to find joint employment with any one of these factors:

� indirect control over working conditions;

� unexercised potential control over working conditions; or

� industrial realities suggest another entity essential to remedy


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“The Board should abandon its existing joint-employer standard because it

undermines the fundamental policy of

the Act to encourage stable and meaningful collective bargaining . . .

The current standard also ignores

Congress’s intent that the term “employer” be construed broadly in

light of economic realities and the

Act’s underlying goals, and has particularly inhibited meaningful

bargaining with respect to the

contingent workforce and other nontraditional employment

arrangements.”

… joint employer if �indirect control over working conditions, [or]

� the unexercised potential to control working conditions, or

�where ‘industrial realities’ otherwise made it essential to meaningful bargaining.

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… the Board [should] adopt a new standard

that takes account … how the putative joint

employers structured their commercial

dealings with each other.

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What Does This

Look Like in The

Real World?


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What Does This

Look Like in The

Real World?

In CNN America, Inc., the NLRB held that CNN was a joint employer of its subcontractor’s employees.

�CNN’s Washington bureau hired TVS (an outside company) to run the cameras in its studio;

�TVS provided video and audio technicians to run CNN’s broadcast feed;

�CNN paid TVS on a cost-plus basis; and

�CNN supplied all equipment used by TVS technicians.


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What Does This

Look Like in The

Real World?


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What Does This

Look Like in The

Real World?


In Guippone, the Second Circuit held a private equity owner could be an employer under the WARN Act.

�The operating company did not have its own board of directors or managers;

�PE firm and operating company shared common officers;

�The PE board participated in the decision to terminate operating company’s employees;

�Most important is whether the PE firm in fact ordered layoffs.

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Financial Exposure

Public Image


Why is this important?

What Does This Look Like in The Real World?

Joint Employer

Traditional Relationship

• Setting employment policies

• Monitoring the number of hours worked

• Influencing discipline / promotions

• Setting pay rates and job classifications

• Dictating employment conditions

e.g., work schedules, breaks, timekeeping

• Dictating recruitment and hiring practices

• Running payroll and benefits

• Training / supervising their employees

• Hyper-managing their efficiency / profitability

• Keeping records on their employees

• Ensuring consistency of service

• Protecting branding and advertising

• Providing high-level shared services

• Consulting with them about start-up issues

• Requiring reports re normal business issues

“Directly” or

“Indirectly”

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Stay out of counter party’s personnel decisions1

Manage/supervise the counter party, not its employees2

Avoid dictating their employment policies or practices3

Don’t become their HR Dept. (for records, benefits, or payroll)

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Parent companies face the highest risks5

What to Do Next

Independent Contractors

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Motivation: 20%-40% labor cost savings

Drivers

Strippers

Start-Ups

Branded Service / Installation

� flexibility� no employment tax� no overtime or minimum wage� no payment for down time

� no benefits or Obamacare� no workers’ compensation� no unemployment contributions� no discrimination statutes

MMM dd, yyyyThis is a sample presentation title in footer 16

� Revenue

� Federal: $2.72 Billion/year in lost revenue

� State: $200+ Million/year (per state)



� Revenue

� Federal: $2.72 Billion/year in lost revenue

� State: $200+ Million/year (per state)


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Too many hunters:

� State unemployment tax dept.

� State workers comp agency

� Private plaintiffs (e.g., discrimination)

� State income tax

� Federal income tax

� Social Security

� Government investigations (e.g., state or federal dept. of labor)


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Too many hunters:






� Social Security



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Too many hunters:






� Social Security



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Too many hunters:






� Social Security


$97M in unpaid stock benefits to misclassified workers$97M in unpaid stock benefits to misclassified workers


Increased attention from federal and state regulators has led to a surge in misclassification lawsuits.

$97Mmisclassifying

freelancers

$27Mmisclassifying

drivers

$6.5Mmisclassifying

installers

$11Mmisclassifying

delivery carriers


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If it’s legal in

California…


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If it’s legal in

California…


In Waddell & Reed, the California federal court approved broker-dealer’s classification of registered representatives as ICs.

�The reps made their own business strategies and decisions.

�The reps worked where they wanted, could hire assistants, and were paid commissions only.

�Fact that registered representatives had to follow broker-dealer’s SEC/FINRA rules doesn’t make them employees.

�See also Arnold v. Mut. of Omaha Ins. Co., 202 Cal. App. 4th 580 (Cal. Ct. App. 2011).

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But it’s still all

about the facts


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But it’s still all

about the facts


In Farmers Insurance, the Iowa federal court held on motion to dismiss that Farmers could be employer under Title VII and ADEA.

� Insurance rep signed contract that he was not an employee.

�However, the court looked past the contract.

�Court rejected motion to dismiss because rep identified company employees who supervised him, assigned him projects and terminated him.

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2 Questions:

Will my contract protect me?

Using a Temp Agency

Will the agency do it right?

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Using a Temp Agency

• Agency is the lone employer

• Agency responsible for all hiring, training, wages, taxes, benefits, firing

• Agency insures and indemnifies company for all employment claims

1. Will my contract protect me? Provide:

BUT, agreements only take you so far.

• The company does not control how the IC does her/his job

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Using a Temp Agency

• Agency size, reputation

• Agency litigation history

• Sophistication of documents/operation

2. Will the agency do it right?

• Online reviews of agency

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Misclassification: The Tests

A-B-C TestA-B-C Test

A. The worker is free from the company’s control and direction in performing the service

B. The work done is outside the employer’s usual course of business

C. The worker is customarily engaged in an independent trade, occupation, profession, or business

IRS TestIRS Test DOL TestDOL Test1) The extent to which the work

performed is an integral part of the employer’s business.

Behavioral Control: Does the company control or have the right to control what the worker does and how the worker does it?

Financial Control: Are the business aspects of the worker’s job controlled by the payer? (e.g., how worker is paid, whether expenses are reimbursed, who provides tools)

Type of Relationship: Are there contracts or employee benefits (e.g. pension plan, insurance, vacation pay)? Will the relationship continue and is the work performed a key aspect of the business?

2) The worker’s opportunities for profit or loss

3) The relative investments in facilities and equipment by the worker and the employer.

4) The worker’s skill in performing the job and initiative required for success.

5) The permanency of the worker’s relationship with the employer.

6) The nature and degree of control by the employer.

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Misclassification: The Tests

IRC Section 530 Safe Harbor TestIRC Section 530 Safe Harbor TestReasonable Basis for IC classification?• Does the rest of the industry do it?• Is company relying on an audit, court case

or attorney?

Has company treated all similar workers as ICs, as opposed to treating some workers as ICs and some similar workers as employees?

Has company consistently reported income on Form 1099?

__4

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Means/Method

Result

Generally an individual is

an independent contractor

if the client controls only

the result of the work, and

not the means and method

by which the contractor

accomplishes it.

Misclassification: Control Test

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Best Practices: What To Avoid

IC’s on premises for extended periods of time (“permatemps”)

IC’s performing core functions of company

IC’s in same positions and performing same work as employees

IC’s constitute more than 10% of workforce

IC’s don’t have their own profit/loss margins


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Best Practices: IC Agreements

• Require IC to be a business entity, and contract with that entity only

• The company is prohibited from controlling how the IC does her/his job

• Use arbitration clauses to inhibit class or collective actions

IF you take the risk of using IC’s or temps, use an agreement:

BUT, IC agreements only take you so far…

• Require indemnity from the entity for employment claims

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Best Practices: Temp/IC Agreements

Looks fine…

BUT…

Well-drafted temp/IC agreements:

1. portray facial compliance with employment laws,

2. create some real protections.

But CAUTION: a look beyond the document can betray it as a mere façade.

The FACTS behind the façade are what matter.

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Practical Advice: Check Benefit Plans

“This Plan applies to employees only, and not to independent contractors.”

“This Plan applies to only to individuals treated as Company employees for payroll tax purposes, regardless of whether a court or government agency determines them to be employees.”

ACA AND INDEPENDENT CONTRACTORS

EMPLOYER MANDATE

� Employer mandate – tax penalty for “large employers” that don’t offer minimum essential coverage to full-time employees (and their dependents) – applies to employers with more than 99 employees in 2015

� Employers with 50-99 employees have until 2016 to comply

A large employer is subject to penalty if at least one full-time employee receives a subsidy for exchange coverage and:

The employer fails to offer coverage to “substantially all” full-time employees (and their dependents) (the “no coverage penalty”); or

Coverage is unaffordable (employee contribution must be less than 9.5% of income) or does not provide minimum value (the “inadequate coverage penalty”)

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EMPLOYER PENALTIES

� Penalty amounts� No coverage penalty: $2,000 per year,

per full-time employee in excess of 30 full-time employees (80 in 2015)

� Inadequate coverage penalty: $3,000 per year, per full-time employee for whom coverage is unaffordable or does not provide minimum value and who receives a subsidy to purchase coverage through an exchange

� Penalty amounts are indexed: $2,000 penalty is estimated to be $2,120 in 2015 and $3,000 penalty is estimated to be $3,180 in 2015

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DETERMINING FULL-TIME EMPLOYEES

Who must be offered coverage – determining full-time employees. The ACA defines full-time employees as those who work a n average of 30 or more hours of service per week

� Independent contractors do not count as employees when determining whether an employer meets the minimum threshold as a large employer

� Independent contractors also are not counted as full-time employees who could trigger potential penalties

� The ACA incorporates the ERISA definition of “employee” as “any individual employed by an employer”

� Final regulations say that an “employee” means an individual who is an employee under the common-law standard

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MISCLASSIFICATION

� ACA increases the potential adverse consequences to employers of misclassifying employees as independent contractors

� Misclassification may trigger assessment of ACA excise tax penalties

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STAFFING AGENCIES – WHO IS LIABLE FOR

EMPLOYER MANDATE?

Provisions on staffing agencies

� Temporary staffing firms – generally will be the common law employer of workers they place on temporary assignment at client employers

� Other staffing firms and PEOs –typically the client employer will be the common law employer

� Safe harbor method by which staffing firm or PEO can provide health benefits to workers on behalf of client employer

� No co-employer concept under employer mandate

= Total Number of Full-time Equivalent Employees

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CONCLUSIONS AND STEPS FOR

EMPLOYERS

� Employee determination by IRS under ACA employer mandate will be evaluated on a case-by-case basis

� Need to analyze control over workers

� Review operational and financial realities to determine who is employer of all workers

� Review and revise client service agreements

� Assure overall compliance with ACA employer mandate

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Contact Information


Tim BrennanAssociate – DLA Piper

[email protected]

312.368.4015

Questions?

Anne PachciarekPartner – DLA Piper

[email protected]

312.368.3488

Michael SheehanPartner – DLA Piper

[email protected]

312.368.7024

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