By Terrence O’Connor and Stephanie Wilson
Although the Bible tells us that “No man can serve two masters,” judges may disagree. Judges are increasingly ruling that, in some instances, a subcontractor’s employee can have two masters – the subcontractor and the prime contractor – under what is known as the “joint employment” legal doctrine.
Virginia employers must deal with the expanding impact of the joint employment doctrine, as the doctrine affects all levels of contracting and subcontracting with respect to a wide range of federal and state workplace laws. Contractors and subcontractors at any tier must confront the reality that a company may be liable for the way its supervisors treat another company’s employees, including putative “independent contractors.”
Obama set wheels in motion
Under President Obama, the Department of Labor issued legal guidance expanding the definitions of employee and employer. First, in July 2015, the DOL broadened the definition of “employee,” such that “employee” included nearly all putative independent contractors. DOL issued a Fair Labor Standards Act Administrator Interpretation. This Administrator Interpretation stated that the focus when determining FLSA applicability is on the economic realities of the employee-employer relationship – 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 in 2015 Administrative Interpretation that most workers are economically dependent on their employer and thus do not qualify as independent contractors who are truly in business for themselves.
Second, in July 2016, the DOL issued an Administrative Interpretation that expanded the way an employee could have “joint employers.” DOL identified 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.” Consider a waiter who works for two separate restaurants that are owned by the same entity. In this scenario, the hours the employee worked for each restaurant 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 rather than the relationship between the waiter and each individual restaurant.
Conversely, when determining whether a vertical joint employment relationship exists, the focus is on the connection between the employee and the potential joint employer. Think a staffing company that has a subcontract with a hospital and that staffing company employs a nurse. The more the hospital controls the staffing company’s employee, particularly with respect to duties, wages, and discipline, the more likely one will consider the hospital an employer of the nurse under the vertical joint employment doctrine.
But has Trump applied brakes?
The Trump administration reversed the DOL’s expansion of the definition of employment when it recently withdrew the 2015 and 2016 Administrative Interpretations. The withdrawal was conducted via 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. Fewer findings of joint employment will likely result under the Trump administration’s “control test” than under the Obama administration’s “economic realities test.” DOL has confirmed that the rescission of these Administrative Interpretations does not change employers’ legal responsibilities under the FLSA.
The state of the joint employer doctrine continues to remain in flux. DOL’s recent actions do not resolve conflicting interpretations regarding joint employment and independent contractor status under state laws, nor does it impact the National Labor Relations Board’s use of its expansive definition of joint employer status. In a recent decision, the Fourth Circuit reasoned that subcontract language trying to establish the independence of the two contractors was of minimal consequence in determining whether joint employment existed, and held that such language will not necessarily defeat a finding of joint employment.
What should employers do?
Thus, it is important for contractors to take additional steps beyond relying on subcontract boilerplate. There are several risk-mitigation measures that contractors and subcontractors alike can take to mitigate or avoid liability under the joint employment doctrine.
(1) Training. Companies should expand supervisor training to ensure the training covers how supervisors are responsible to non-employees. Supervisors are at the heart of a company’s efforts to prevent workplace sexual harassment and discrimination. Because companies presumably already train their supervisors to prevent sexual harassment and discrimination, it should be no great effort to require supervisors to extend this to the treatment of a subcontractor’s employees.
(2) Insurance. Companies should consider obtaining employment practices liability insurance that covers both employees and those working under their control. EPLI covers a wide range of wrongful workplace activities including wrongful termination, discrimination, and sexual harassment.
(3) Indemnification. Companies should carefully review and make sure that the indemnification provisions in their subcontracts cover not just recognized employees but also those who might claim to be employees. Aside from being long, ridiculously compound, and in need of punctuation – or perhaps because of these characteristics – indemnification clauses often get ignored in the subcontract negotiation process. Careful drafting of an indemnification provision, however, has numerous benefits. The indemnification provision should provide that the directly responsible party will indemnify the other party should it be found liable under the joint employer doctrine. The indemnification provision should also allow the recovery of attorneys’ fees for the indemnified party.
Despite the DOL’s recent rescission of Obama-era legal guidance expanding the definition of employment, the joint employment doctrine in some form is here to stay. A contractor or subcontractor at any tier must deal with the risks that the joint employment doctrine presents. By taking the three steps above, a contractor or subcontractor can take the preferred approach of dealing with this issue proactively, rather than litigating these problems in court.
is a partner and Director of Government Contracts at Berenzweig Leonard. He has practiced government contract law for over 45 years. After 15 years as a federal attorney, he entered private practice prosecuting contractor claims before the U.S. Court of Appeals for the Federal Circuit, the U.S. Court of Federal Claims and the various Boards of Contract Appeals. He has also prosecuted government contract protests before the Government Accountability Office and the COFC. While in private practice, he also continued to work with contracting officers and government procurement professionals as a government contracts instructor for Management Concepts, Inc. Since 1984, Terry has been teaching government contracts law to contracting officers, contract specialists and other government procurement professionals. He can be reached at firstname.lastname@example.org or (703) 760-0626.
is a partner and Co-Director of Government Contracts at Berenzweig Leonard, and is a former law clerk for Judge Lawrence M. Baskir of the U.S. Court of Federal Claims. Stephanie represents government contractors of all sizes in bid protest and claims litigation before the U.S. Court of Federal Claims, U.S. Government Accountability Office, Boards of Contract Appeals, and federal agencies. She advises government contractors on a variety of matters such as Service Contract Act compliance, subcontracting and teaming issues, FAR compliance, suspensions and debarments, and general business and employment issues. Stephanie also represents corporate clients and executives on a variety of business and employment related matters, including Fair Labor Standards Act claims, non-compete disputes, breach of contract claims, and other business disputes and transactional matters. Stephanie has been selected as a “Super Lawyers Rising Star” for 2015-2017 in the field of government contracts. She can be reached at email@example.com or (703) 760-0485.