Earlier this month, in An Economic Reality: Uniform Regulatory Definition Needed for Who Is an “Employee”, we argued that a standardized, control-based test for legally categorizing workers would benefit both employers and employees. In this commentary, we explain why similar uniformity is urgently needed in how regulatory agencies and courts define “employer.”
The legal definition of “employer” is critical because employers are responsible for compliance with federal and state labor laws and can be held vicariously liable for the actions of their employees. It is most relevant, and controversial, in situations where businesses outsource or subcontract certain work responsibilities, and in franchise arrangements. Too broad a definition of employer could force businesses that outsource, subcontract, or franchise to act as “joint employers” for employees of entirely separate businesses.
The traditional test for whether one business is a joint employer with another business follows the common law of agency. Analogous to the definition of “employee” advocated in our previous post, if Employer #1 and Employer #2 share direct and immediate control over matters governing the essential terms and conditions of employment, they are joint employers.
Unfortunately for both employers and employees engaged in outsourcing, contracting, or franchising, joint-employer regulation is plagued by a multitude of different legal standards, some of which stray far afield from the common-law test of actual control. Richard Heiser, Vice President of FedEx’s Workforce Support Group, testified at a July 12, 2017 US House Education and the Workforce Committee hearing that federal agencies and courts have created 15(!) different joint-employer tests under just three labor laws: the Fair Labor Standards Act (FLSA), Title VII, and the National Labor Relations Act (NLRA). In January 2016, the Department of Labor (DOL) exacerbated the confusion by issuing an Administrator’s Interpretation declaring that joint-employment status under the FLSA hinged on an employee’s “economic dependence” on both employers.
That same month, DOL’s informal guidance influenced the US Court of Appeals for the Fourth Circuit to dramatically depart from other circuit courts in holding a satellite television provider and an installation contractor jointly liable in an FLSA wage suit. The decision, which has been appealed to the Supreme Court, held that DirecTV was a joint employer because it was not “completely disassociated” from the business that employed the installation technicians.
On the NLRA-enforcement side, starting in 2014, the National Labor Relations Board (NLRB) drastically changed its approach to identifying joint employers. That year, the agency’s general counsel authorized 43 NLRA complaints against both McDonald’s USA and its franchisees. Other joint-employer charges were soon filed against other franchising businesses. One of those complaints, against Browning-Ferris Industries and a contractor that supplied sorting, screen cleaning, and housekeeping services, resulted in a 2015 NLRB decision. The decision found joint liability because both the contractor and subcontractor “reserved authority to control terms and conditions of employment.” The decision swept away 32 years of reliance on the actual-control test.
Browning-Ferris appealed the NLRB ruling to the US Court of Appeals for the DC Circuit. The company, with the support of numerous amici including WLF, urged the court to overrule the Board and restore the traditional control test. In a sign that the NLRB’s regulatory reversal has influenced other employment regulatory agencies, the Equal Employment Opportunity Commission filed an amicus brief supporting the Board. The court heard oral arguments on March 9.
The prevailing uncertainty over how regulators and courts determine joint employment has cast a pall over thousands of affected businesses and employees. The NLRB’s potential-control test strikes at the very heart of the franchising business model. One franchisor explained at the July 12 House committee hearing that the NLRB’s actions chilled her business from providing training, software support, and other assistance routinely offered to franchisees. Another witness cited the uncertainty as a major factor in slowing franchise expansion. The owner of a small gourmet popcorn company stated at a July 27 Capitol Hill press conference that the current regulatory risks deterred her from franchising. Decreased franchise opportunities mean fewer opportunities for local entrepreneurs to start businesses, and, in turn, less job creation.
A hazy joint-employment regulatory atmosphere could reduce companies’ willingness to outsource such non-core business functions as food and janitorial services, which increase costs and reduce efficiency. Entire businesses that specialize in offering those non-core services could thus cease to exist. Exposure to joint liability could even frustrate some businesses’ corporate social responsibility (CSR) programs that require suppliers and contractors to embrace certain employment, environmental, or human-rights policies.
DOL’s June 7 withdrawal of the January 20, 2016 Administrator Interpretation is a laudable first step toward a return to the common-law standard. DOL’s next logical step would be to issue a new Interpretation stating that the agency intends to utilize the actual-control test in making joint-employer determinations. Perhaps such guidance will encourage the President to order that all employment regulators utilize the traditional common-law test, an approach recommended in a recent WLF Legal Backgrounder.
Positive developments in the courts would further the goal of a uniform, rational joint-employer standard. A DC Circuit decision reversing the NLRB in Browning-Ferris would make a significant difference, as would the US Supreme Court’s granting certiorari and reversing the Fourth Circuit’s DirecTV decision. Even such outcomes at the federal level would not prevent state courts from continuing to apply different tests when evaluating state enforcement actions and private lawsuits.
Durable uniformity and certainty can of course best be achieved through federal legislation that creates one federal standard for all agencies while also preempting conflicting state and local laws. The House bill introduced at the aforementioned July 27 press conference advances uniformity by amending the FLSA and NLRA to include an actual-control test for joint employment. Perhaps with political realities in mind, the bill does not include a federal-preemption clause.
Undoing joint-employer regulatory uncertainty will be time-consuming and challenging. It is a worthy endeavor, however, one which can relieve concerns that chill economic growth today as well as establish certainty for tomorrow’s employers and employees.
Also published by Forbes.com on WLF’s contributor page.