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Posted on Friday, July 14, 2017

Mitigating Risks of Joint Employment

Although the Bible tells us that “No man can serve two masters,” in some instances, a subcontractor’s employee can have two masters – the subcontractor and the prime contractor – under the “joint employment” legal doctrine.

Employers must deal with the expanding impact of this doctrine as it affects all levels of contracting and subcontracting with respect to a wide range of Federal and state workplace laws. The fact that a company may be liable for the way its supervisors treat another company’s employees, including putative “independent contractors,” is a risk that contractors and subcontractors at any tier must deal with.

Moreover, according to one appellate court, boilerplate subcontract provisions asserting that the subcontractor is an independent contractor are of minimal consequence in determining whether joint employment existed and will not necessarily defeat a finding of joint employment.

As we previously discussed, in July 2015 the DOL broadened the definition of “employee,” such that it included nearly all putative independent contractors. DOL issued an Administrator’s Interpretation, which replaced the prior common law “control test” with an “economic realities” test – that is, “whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor).” Given the broad statutory definition of “employ” under the FLSA, the DOL concluded that most workers are employees that are economically dependent on their employer, and would not qualify as an independent contractor.

Second, in July 2016, the DOL issued an Administrator’s Interpretation that also applied this “economic realities” test to the joint employment doctrine. There are two types of joint employment: “horizontal” and “vertical” joint employment.

In a horizontal joint employment relationship, the employee works for two or more employers that “are sufficiently associated or related with respect to the employee such that they jointly employ the employee.” One example is a waiter who works for two legally separate restaurants that are owned by the same entity. In this scenario, the employee’s hours worked for both restaurants are aggregated and considered as a single employment for the purposes of calculating overtime under the FLSA. Thus, the focus here is on the relationship between the two restaurants and not the relationship between the waiter and each individual restaurant.

In determining whether there is a vertical joint employment relationship, the focus is on the connection between the employee and the potential joint employer. One example is a nurse employed by a staffing company that has a subcontract with a hospital. The more the hospital controls the staffing company’s employee, particularly with respect to duties, wages, and discipline, the more likely it will be that the hospital will be considered an employer of the nurse under the vertical joint employment concept.

The Trump Administration recently withdrew the 2015 and 2016 Administrator’s Interpretations in a short, three-sentence announcement that, in effect, repealed but did not replace this guidance; rather DOL reverted to long-standing regulations and case law. This action likely demonstrates current Labor Secretary Alexander Acosta’s stated preference for the common law “control test” that previously had been used to analyze joint employment issues. However, DOL has confirmed that the rescission of these Administrator’s Interpretations does not change employers’ legal responsibilities under the FLSA.

The state of the joint employer doctrine continues to remain in flux. Despite the DOL’s recent rescission of Obama-era legal guidance expanding the definition of employment, the joint employment doctrine is here to stay.

Thus, it is important for contractors to take additional steps beyond relying on such subcontract boilerplate to mitigate against potential joint employer liability, such as expanding supervisor training to ensure it addresses treatment of employees of subcontractors, obtaining employment practices liability insurance (EPLI), and carefully reviewing and drafting indemnification provisions in subcontracts to make sure that these provisions cover not just recognized employees but also those who might claim to be employees.

A contractor or subcontractor at any tier must deal with the risks that the joint employment doctrine presents. By taking the steps above, a contractor or subcontractor can take the preferred approach of dealing with this issue proactively, rather than litigating these problems in court.

Berenzweig Leonard is teaming up with Red Team Consulting for a monthly newsletter featuring upcoming contracts, key protest decisions, legal updates, events, and more. This post was published in the July 2017 Monthly Insights newsletter. For more information on how to sign up for Monthly Insights, please click here.

Terry O’Connor is the Co-Director of Government Contracts for Berenzweig Leonard, LLP, and can be reached at TOconnor@BerenzweigLaw.comStephanie Wilson is Partner and Co-Director of Government Contracts at Berenzweig Leonard, LLP. She can be reached at SWilson@BerenzweigLaw.com.