Nasir Pasha & Matt Staub

Why Joint Employment Will Become a Major Issue for Employers [e250!]

Nasir and Matt celebrate episode 250 by discussing the Department of Labor opinion about joint employment and how to distinguish between horizontal and vertical joint employment.

Transcript:

NASIR: Welcome to Regally – uh, regally? Welcome to Legally Sound Smart Business.
I’m your king, Nasir Pasha, and this is where we talk about… I don’t know, I’m so off now. This is the podcast where we cover business in the news and add our legal twist. My name’s Nasir Pasha.
MATT: I’m Matt Staub and I thought I was on mute for a second – all sorts of off.
NASIR: We’re so off. Horrible beginning but we’re going to keep recording.
MATT: We’ll be fine.
NASIR: I think that’s actually the first mistake we’ve ever had in this podcast now that I think about it.
MATT: It’s not bad. This is the 250th episode so one mistake every 250, I’ll take that. It’s a pretty good success rate.
NASIR: Did we forget to do something special for 250?
MATT: Yeah.
NASIR: Of course.
MATT: I just had lunch with a couple of people and they asked about the podcast. They actually asked – I’m not making this up.
NASIR: Okay, yeah.
MATT: I said, “Well, yeah, we’re actually recording 250 later today.” It seemed pretty impressive when I said that to them.
NASIR: Not as impressive now that we’re actually in it.
MATT: 300 will be pretty big because that’s your favorite movie.
NASIR: Mostly the second one, though. What is it – 301? I don’t know.
MATT: Is that a parody?
NASIR: No, there was a sequel to it. It’s horrible. Not that the first one’s that great, too. I mean, I think the first one, you know, didn’t have much of substance to it but it was kind of eye candy, you know?
MATT: Well, when we talk about employment law, we usually talk about the same few things. It’s obviously employees and independent contractors.
NASIR: Yeah.
MATT: Wrongful termination, discrimination, things like that. What we’re going to talk about today, I think is going to become a pretty big issue in the employment front and I don’t think it gets talked about too often and maybe that’s the reason that we – just this past week or two weeks ago – the Department of Labor came out with this. It’s not new law; it’s really just an explanation or it goes into more detail about the topic of joint employment which I don’t think many businesses are even aware of this – outside of the ones that probably fit the idea.
NASIR: Even if they’re not aware of it, I think more and more businesses are entering this world and where these types of relationships kind of occur is where you have one person, an employee, that has so-called loyalties or obligations or are being controlled by two different entities. Where that line is drawn and what kind of liability that’s exposed is what really the Department of Labor has kind of shared their opinion on.
MATT: I think that’s a good way to describe it or to sum it up very briefly is when more than one business is involved in the work being performed by somebody and they might possibly have two separate employers and that’s when the whole joint employment analysis comes into play. This isn’t a situation where, you know, I have my normal 9 to 5 job during the day and then I go moonlight at night working wherever.
NASIR: Burger King?
MATT: I was trying to pick somewhere that’s open… I guess it’s open late? I don’t know. I don’t know the last time I’ve been to Burger King.
NASIR: Wait, you do work at Burger King, don’t you?
MATT: Yeah.
NASIR: I thought that’s what you do in the evenings. I always call you and I always hear people talking in the background, ordering French fries. But, yeah, that’s completely different because, obviously, the owner of Burger King – or I should say Burger King and the other employer – really have no relation to each other so we’re talking about real true joint employment. And so, the Department of Labor has – and we’ll talk about the significance of this in a second but let’s just figure out, okay, when is joint employment implied? There are basically two scenarios, right, Matt? I mean, there’s a horizontal and vertical type of joint employment.
MATT: Yeah, and this is really, well, there’s a couple of things they had in this administrator’s interpretation they put out. One of them was just saying we have pretty broad scope here on what we’re going to consider joint employment which is no surprise but the other one is really what you just talked about – this horizontal and vertical versions of this joint employment. The way I look at it is horizontal is when you have an employee and they work for two related employers. I think the classic example of this would be you have a person that works at a restaurant on Monday, Wednesday, Friday, and then they work at a related restaurant Tuesday, Thursday, Saturday – and we’ll get into the details of this but that’s not necessarily looked at as two separate jobs. Going through this, I think it’s seven? No, this was nine factor tests they’d laid out. If there’s a significant degree of relation between the two, they’re going to be considered joint employers and, you know, we’ll get into the significance of that.
NASIR: Another example of that kind of horizontal relationship is where you have a good-sized company that has multiple operations that are involved with different kinds of businesses or have different locations and each of them are separated into separate entities – they have separate EINs. And so, even from an accounting perspective, sometimes, what will happen is that one entity will pay the payroll and then will reimburse the respective entities, depending upon how that employee is being used proportionally.
Let’s say you have a regional manager that operates at multiple locations. You have different entities for that and then you also have maybe a management entity and a billing entity – all these different things – and that regional manager kind of has this cross-section of all these things and so there may be some joint employer aspect in that.
Another one is where you’re also hiring – I don’t want to misspeak, this may be going into the vertical area but I think this is in the horizontal area where – you’re hiring a third-party professional employment organization and usually they are involved with this type of structure as well.
MATT: I think that’s more vertical but that’s fine.
NASIR: Is it more vertical? Well, okay. That’s the second mistake we’ve had in this podcast. I can’t believe that.
MATT: It’s a good lead into vertical.
NASIR: Okay.
MATT: So, this one’s a little bit more difficult to explain conceptually but there’s an employee and an employer and it’s whether the employer of this employee is an intermediary of another employer. Basically, what you just described.
NASIR: Oh, the PEO.
MATT: That’s a good example of it. I think one other example that was in this was there’s a general contractor and they have a subcontractor and that subcontractor has an employee. The subcontractor and the employee – that’s an employee-employer relationship – it’s still possible that you can call it a subcontractor to the general contractor. There could be an employment relationship there making that employee an employee of both the subcontractor and the general contractor.
NASIR: Yeah, which may be scary for some people because, if you start thinking about staffing agencies or leasing employees, this is where that comes into play because, just from an example perspective, let’s say that I have an employee that I want to, as part of my services to another company, I’m giving them the employee, so to speak, to use for what they’re doing. The other company may be doing that in order to avoid that employer-employee relationship and all the liability that comes with it, but they may not be able to do that. Of course, this is the whole issue. That’s why we’re talking about this – you know, when you have the Department of Labor interpreting joint employment between two parties, especially in a vertical type of relationship, there may be some parties that didn’t think that they were going to be an employer to all of a sudden have that status.
MATT: Yeah, if I had to take a guess on the percentage of issues that are going to be vertical and horizontal, it has to be a heavy majority with the vertical. Horizontal, I’m not going to say it’s straightforward but there’s less grey area, I guess I should say, than the vertical.
NASIR: Yeah, and the employers kind of know. In other words, especially since one of the factors of a horizontal relationship is that there’s kind of joint ownership or affiliation between the two entities. So, already, there’s at least one of the entities that already understand that they’re taking on the liability. And so, sharing that liability with another related entity that may have common ownership is not necessarily and additional exposure. It’s just kind of spread out exposure.
MATT: Yeah.
NASIR: Again, the ramifications aren’t that great either.
MATT: Yeah, and we’ll hit horizontal real quick. I mean, it’s all about the relationship between the two “employers.” I mean, the more related they are, the more likely they are to be seen as having a joint employment relationship with this one worker. This has nine factors and we’re not going to go through all nine factors on here but, I mean, that’s really what it comes down to – the relationship between the two employers and how significantly those two are connected. You know, obviously, it’s not going to be a surprise if you’ve two employers and there’s no connection between the two.
NASIR: Yeah.
MATT: I mean, that’s not going to be a joint employment. But, if there are overlapping things like the ownership or sharing certain administrative aspects of it – I think it’s kind of like what you were mentioning before – then, yeah, that’s going to raise the question of whether there’s a joint employment relationship.
NASIR: I’m trying to think, also, I think another example of horizontal employment that might be related – and you tell me, I mean, if this is horizontal or vertical, not that it matters, frankly, from the Department of Labor.
MATT: No.
NASIR: This is just ways to define joint employment but, if you have an office – this is what a lot of lawyers do, right? You have a group of lawyers that are solo practitioners in the office but they may share the same secretary or the same front desk.
MATT: Yeah.
NASIR: Even though there’s no joint ownership, I think that would be considered horizontal but, at the least, that would be joint employment and they may share in the cost of paying that employee, but they also share in the liability as well.
MATT: Yeah, and I think it would be joint employment. I don’t know if that secretary just worked the standard hours and there was no, I mean, it all kind of, once we’ve determined that there is joint employment, we’re going to talk about some sort of violation at that point. If there’s no violation, it doesn’t matter – who cares?
NASIR: Yeah.
MATT: Well, I shouldn’t say that. There’s an administrative aspect to it on, I guess, who’s going to pay that person. But, in terms of the big issues involving joint employment, it’s going to be whether there’s some sort of overtime violation or something like that – you know, the wage in labor laws – because, just a quick example, this person works 25 hours for Employer A, 25 hours for Employer B; individually, they’re fine, but together that’s 50. If they work more than 40 in one week, we’re talking 10 hours of overtime and that’s going to be an issue.
NASIR: That’s right, and I think that kind of sums up what the significance or ramifications of this joint employment status is – that, in theory, one employer may not have full control of what the other employer is dictating for that employee. I’m using this in the same example that Matt made where Employer A is doing 25 hours and Employer B is doing 25 hours and that’s the understanding. For this employee, we’re not going to pay overtime – you know, 40 hours a week – and one employer decides, “Oh, well, I need a couple of extra hours,” without telling the other employer, that other employer from the Department of Labor’s perspective may be jointly and severally liable for any kind of violations that stem from that kind of overtime violation – assuming that, you know, they don’t pay overtime, et cetera.
MATT: Yeah.
NASIR: And so, if that’s the case, the other employer may be kind of blindsided by this kind of liability.
MATT: Yeah. You know, Employer B might not even know it happened and it isn’t something they’d even consent to, possibly, like you said, because they are jointly and severally liable, then they might be on the hook for it or they might be the ones that have to end up being on the hook for it, I guess I should say.
NASIR: That’s right.
MATT: So, I think that’s fairly straightforward even though I just said a couple of minutes ago I’m not going to say it was straightforward. I think, in comparison to the vertical, I think it’s more clear-cut, I should say.
So, for the vertical, I think how the Department of Labor defined it is the economic dependence. Think of it as a vertical line. You know, you have employer, you have the intermediary employer, and then you have the employee – if that’s like the totem pole. It really is the degree – not the degree – the economic dependence of that relationship with the employer and the intermediary employer. For this, of course, is another test and that’s, you know, why does it matter if it’s horizontal or vertical? Well, it’s the way you analyze the tests here.
And so, for the vertical, how I saw it was it’s very similar to an independent contractor now. It’s really how much control is involved and a lot of similar factors that have to do with whether the person’s an independent contractor or not.
NASIR: That’s interesting because they have to determine whether they’re an actual employee and it’s a similar definition but that’s why it’s getting a little more complicated when you have multiple parties involved and I already mentioned the staff agency and stuff like that. What’s interesting about this opinion in the context of this, and this may get a little too much in the law, I’ll try to keep it high-level as that. There’s been cases kind of back and forth – depending upon where you look at it, where you’re operating in the country – where they’ve actually held staffing agencies to be liable for certain types of labor law violations or even, for example, disability discrimination under the ADA. In Texas, there was a case where they found that the staffing agency could be held responsible. I’m even thinking we may have covered that. But another aspect that we also covered is the liability of a franchisor and that’s something that’s been in the news quite a bit. For example, McDonald’s – is McDonald’s corporate also a joint employer with a franchise owner of a McDonald’s? So far, the courts have said, “No, they’re not. There’s no joint employer relationship.” Whether this opinion changes that or not, but I do know that this is an issue that is being challenged and resolved, and there seems to be this tendency that I’m seeing or I should say a good chance that McDonald’s, as a franchisor, may be held as in joint employer with the franchisee which the ramifications of that is pretty significant so I assume McDonald’s and other franchisors are going to put up a big fight for this.
MATT: You know, in terms of this administrator’s interpretation that the DOL put out, it doesn’t mention franchise or franchisee relationship.
NASIR: No, it doesn’t, yeah.
MATT: But it’s something that could definitely happen. I mean, I gave this example earlier.
Let’s say you buy a house. We’ll do a hypothetical few. You buy that mansion you were talking about.
NASIR: Bruce Wayne’s mansion?
MATT: I was going to try to think of a Houston suburb but I realized I don’t know any. So…
NASIR: Oh, River Oaks.
MATT: River Oaks.
NASIR: Would be what you’re looking for.
MATT: Okay. You want to redo your kitchen so you hire this company to do it and they’re the general contractor. They sub out…
NASIR: What kind of cabinets am I getting?
MATT: 100 percent pure oak, mahogany color.
NASIR: Perfect. I’m into it now. I got you. I’m following you.
MATT: Brass knobs. All the nice stuff. Soft opening and closing hinges.
So, you hire this company. They subcontract out parts of the job – like electrical, for example. Let’s say the subcontractor has their business and they have an employee that shows up. Well, if that employee shows up – like I said, at this point, no relation to that general contractor of the company you hired – and that employee for the subcontractor, you know, they get trained through the general contractor, they used equipment of the general contractor, there’s workers’ comp insurance on them.
NASIR: Yeah.
MATT: The general contractor has a say over what the employee does. The employee of the sub is going to be considered an employee of the general contractor – of the GC, too – and there could also be the relationship of an employment relationship between the GC and the sub which is kind of, you know, worst case scenario – that’s really worst case scenario for this.
NASIR: And that’s scary, right? I mean, from a GC’s perspective, when they’re out doing their construction work, to be responsible or their subcontractor’s employees – you know, it’s difficult.
We have a few minutes left and we can talk about how, from a contracting perspective, especially when we’re talking about vertical joint employment because, again, in horizontal, we’re talking about related entities so there might be some, you know, the contract between them may not be as important unless the related entities are very loosely connected. But, either way, let’s say there’s joint employment relationship, contracting between the employers becomes ultra-important, especially when it comes out with, say, to the indemnification aspect of it.
MATT: Yeah.
NASIR: And this gets tricky because, oftentimes, as we’ve talked in the past, indemnification is nice and all but it’s sometimes worthless if the other party doesn’t have the cash to back it up. And so, do they have insurance to do that? And the question is, is the insurance policy going to actually be triggered for indemnifying for that particular issue and it can get really complicated, actually. It’s not that simple but even insurance agents have trouble really presenting themselves well representing their clients well, I should say, and making sure that these types of instances are covered. Just going back to the four lawyers in an office and you have a shared employee and overtime issues, assuming you have an insurance that covers those kinds of issues, whether or not they will actually indemnify an employee or for something else that another employer did, that’s a different issue.
MATT: Yeah, and that’s important, and I’m going to pull a sentence from this interpretation that I thought was very interesting and it kind of just goes to what you’re saying.
“Where joint employment exists, one employer may also be larger and more established, with a greater ability to implement policy or systemic changes to ensure compliance. Thus, WHD may consider joint employment to achieve statutory coverage, financial recovery, future compliance, and to hold all responsible parties accountable for their legal obligations.”
NASIR: Wow.
MATT: I mean, that’s kind of crazy.
NASIR: I think that’s a reaction to a lot of large companies. They contract with small businesses in order to, I mean, let’s just speak frankly, I mean, to get around hiring their own employees.
MATT: Yeah.
NASIR: The DOL and these other agencies want to make sure that, okay, just because you’re hiring someone else to do the work for basically a replacement of an employee that you would otherwise have hired if you didn’t hire this other company doesn’t mean that you’re not going to be responsible. There’s some definite reasonable rationale to that, of course, that doesn’t make, you know, these other companies too happy.
MATT: Yeah, there’s more takeaways in this than our normal episodes, I think.
NASIR: We can just link the opinion and you guys can just read it and interpret it yourself.
MATT: Yeah, to circle back to what I was saying earlier, I mean, this isn’t new law.
NASIR: That’s true.
MATT: They’re just providing more guidance which I’m always in favor of – well, I shouldn’t say always – I’m usually in favor of because the more clarification that we have on our end, that’s more that we can work with and we have a better idea of what the result’s going to be.
NASIR: I think you make a good point because, when the Department of Labor and other agencies do issue opinions like this and interpretations, one could argue, “Well, they’re trying to clarify and ambiguity and, you know, what’s going on.” To me, that may be part of it but, usually, when they do come in, it shows that there’s a focus on behalf of the department that they’re going to be focusing on this issue. And so, you lawyers out there or you employers out there, pay attention because now that we’ve issued guidance, then you don’t really have an excuse anymore. And so, if you get caught in this, then we’re going to enforce this fully.
MATT: You’re very right. That’s a stern lecture you just gave to all the attorneys out there.
NASIR: I know, I felt like I was really talking to the attorneys out there. If you don’t do it, then you won’t get your dessert!
MATT: Yeah, and not to harp on what I said earlier, well, that’s why I think this is going to be a big issue moving forward. I mean, this came out and we talked about, obviously, the independent contractor-employee thing, I think there was an interpretation that came out last year – yeah, there’s definitely something and it kind of was another clarification. But, yeah, this is going to be a big issue and I think we’re going to start seeing the government cracking down on this.
NASIR: And plaintiffs’ lawyers because now attorneys, it’s more likely that they’re going to file a suit if they can find another joint employer that may be, like you said, more established and has a bigger pocket.
MATT: Yeah, the ones that need to look out are the general contractor in those examples of the vertical employment and I think they’re going to be the most at risk in this. Employees are fine, I think. Employees may make out great in this.
NASIR: Yeah, good for the employees, bad for the employers – very typical. Nothing wrong with that, I suppose. Well, I think that is our episode – number what is it again?
MATT: 250.
NASIR: Oh, yeah, 250. It’s been so long. I don’t know if we carried over to 251 on this episode or not.
MATT: Ah, I think we’ll be okay.
NASIR: All right.
MATT: All right, keep it sound and keep it smart.

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