Independent Contractor and Exempt Employee Classification Review Should Include Joint-Employer Status


In Depth

The U.S. Department of Labor’s (DOL) issuance last week of independent-contractor misclassification guidelines—as well as its recent issuance of proposed changes to the overtime rules—underscores that employers should be reviewing their independent-contractor classifications and wage and hour exempt-employee classifications. But the audit should not end there, because, even if an employer has correctly classified its own workforce, it still may be held responsible for a variety of employment liabilities if found to be a “joint employer” with a company which has misclassified its own workers. Claims of a joint-employer relationship may arise in the following situations:

  • A company that hires contractors, such as cleaning services or maintenance services, or a management company that staffs and operates its business
  • A company that outsources some of the work integral to its business model, such as a manufacturer that contracts with a trucking company for shipping
  • A company that uses a staffing agency to obtain additional or temporary help
  • A franchisor that contracts with others via franchise agreements
  • Any company with a relationship to a subsidiary or other corporate entity
  • A private equity company that has substantial involvement in management of a portfolio company

The tests used to determine independent-contractor status and joint-employer status vary somewhat depending on the employment statute involved. However, there are practical steps an employer can take—and should consider in an audit—to minimize risk it will be found to be a joint employer of another company’s (vendor’s) workers under any of the employment statutes. To the extent practicable, an employer should consider taking the following actions:

  • Have a written agreement with a vendor which requires the vendor to comply with all federal and state labor and employment statutes, and which contains an indemnification provision if the vendor fails to do so;
  • Include in the written agreement the requirement that the vendor treat its workers as employees, not independent contractors;
  • Specify in the written agreement the work to be performed by the vendor’s employees, and avoid having the vendor’s employees perform work that is outside the scope of the written agreement;
  • Avoid issuing instructions, work orders or tasks directly to the vendor’s employees instead of communicating with the vendor’s supervisors and managers;
  • In dealing with a vendor, communicate about and focus on the result and not how the vendor will accomplish the work;
  • Avoid having the employer’s employees work with or assist the vendor’s employees;
  • Avoid setting the vendor’s staffing levels;
  • Avoid requesting that specific employees of the vendor perform work for the employer, and have the vendor provide day-to-day control over its workers;
  • Avoid disciplining or addressing the performance of the vendor’s employees, as opposed to auditing the vendor’s performance;
  • Avoid any involvement in the setting any terms and conditions of employment of the vendor’s employees;
  • Avoid providing the vendor’s employees with badges, e-mail addresses or other similar indicia of employment used by the employer’s employees;
  • Pay the vendor’s employees by piece or fixed rate, rather than by hours worked;
  • Avoid hiring vendors to perform the same type of work performed by the employer’s employees; and
  • Have all-staff meetings, trainings, orientations, and other work or social functions be available to the employer’s employees only and exclude the vendor’s employees.

An employer who becomes a joint employer of another company’s workers faces potential liability for, among other things, failure to pay minimum wages and overtime; failure to provide meal and rest breaks; failure to provide worker’s compensation and other benefits (including health insurance coverage under the Affordable Care Act); failure to withhold taxes; and unlawful employment practices under federal and state discrimination statutes. Given the DOL’s heightened scrutiny of proper classification of workers and wage and hour compliance (and parallel state initiatives), increased enforcement actions and private litigation will continue at an elevated pace. Employers should now ensure that 1) their own practices in these areas are sound and 2) that they will not be required to answer for another company’s misclassification of its workers.