March 09, 2015 Practice Points

Ever-Expanding Attacks on Non-Traditional "Employers"

Since when am I the boss?

By Erin Leach

In the past few years, it has become increasingly common for plaintiffs to attempt to broaden their potential recovery sources by naming multiple defendants in employment actions under a joint-employer theory—often including larger but more attenuated entities. This argument frequently arises in the following situations: (1) parent and subsidiary companies, (2) franchisors and franchisees, (3) staffing companies and their clients, and (4) contractors and sub-contractors. Generally under labor and employment laws, joint employers are found to exist where two separate legal entities share the ability to control or determine essential terms and conditions of employment, including hiring, firing, disciplining, supervising, scheduling, and directing employees. Where a joint-employment relationship is found, both entities must comply with the applicable employment laws and are subject to civil liability and damages whether the claim is brought under labor laws, wage and hour laws, leave laws, discrimination/harassment/retaliation laws or tort liability. Under the joint-employer theory, plaintiffs seek to hold multiple alleged employers jointly and severally liable for employment-law violations arising in the course of their employment.

Under labor laws, if an entity is found to be an employer and to have committed an unfair labor practice, the company may be liable for back pay, reinstatement or front pay, litigation expenses of both the National Labor Relations Board (NLRB) general counsel and the union, and injunctive relief. Under wage and hour laws, potential claims for which liability may be found include, but are not limited to, minimum wage, overtime, failure to timely pay all wages due, failure to provide meal periods and/or rest breaks, failure to reimburse for expenses, and inadequate wage statements. Recovery on certain wage claims includes recovery of reasonable attorney fees. For violation of an employee’s leave rights, an employee may be entitled to reinstatement, lost wages and benefits, other direct costs, liquidated damages, attorney fees, and costs. Within the discrimination/harassment/retaliation realm, damages include, but are not limited to, back pay, reinstatement or front pay, injunctive relief, compensatory damages for pain and suffering, punitive damages, and reasonable attorney fees and costs. For employment tort claims, employees are generally entitled to recover the amount that will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not— including back pay, front pay, emotional-distress and mental-suffering damages, and other pecuniary damages, as well as punitive damages. What this all means is that there is a lot of money at stake if a court determines that a company is a joint employer.

What Can a Company Do to Reduce Potential Joint-Employer Risks?

While the specific test for who constitutes an employer varies depending on the claim alleged, the key is generally the economic reality of the situation and the amount of control exercised over day-to-day operations based on a totality of the circumstances. The key is to limit the appearance that the company has any control over the dealings with the employees. For clarity, the below top five best practices are discussed in terms of primary and secondary, with the primary being the franchisor, parent company, general contractor, or client of staffing company; and the secondary being the franchisee, subsidiary company, subcontractor, or staffing company.

Employee handbooks/policies/forms. The safest course is for a primary not to provide its secondary with template employee handbooks or policies. However, if the primary does provide employee handbooks to its secondary, the primary must be sure that the handbook and the acknowledgement to the handbook explicitly state that the worker is an employee of the secondary, not the primary, and that the primary does not exercise control over the employee’s performance of duties, scheduling of hours, or other terms or conditions of employment. Also, the primary should avoid providing secondaries with employment applications or other employee forms or templates that they are required to use.

Essential employment decisions. A primary must avoid intruding on its secondary’s essential employment decisions, including hiring, firing, disciplining, scheduling, setting wages, and establishing working conditions. A primary should not set specific work schedules for the secondary’s workers nor should it set the pay structure for the secondary’s workers.

Review the relevant agreement with the secondary. Primaries must watch for overly broad statements of the primary’s ability to control day-to-day operations of the secondary. A primary should include affirmative statements clearly setting forth that the primary has no control over employment matters including personnel decisions, the direction of the workforce, or the terms and conditions of employment of the secondary’s employees. The primary should also consider including an indemnity provision in the agreement with the secondary to explicitly set forth that the secondary assumes all responsibility with respect to employment liabilities.

Keep a distance from secondary’s workers. A primary should give directions to the secondary’s owner, not the employees themselves. A primary does not want to create any appearance that it has any control over the day-to-day operations of the secondary.

Training. A primary should make the secondary solely responsible for training its own work force whether based on the secondary’s own standards or the primary’s standards. A primary should let potential breach of the agreement with the secondary motivate the secondary to hire qualified people and appropriately train them.

Conclusion Companies should get ahead of the game in warding off joint-employer arguments by reviewing their current agreements, policies, and practices.

Erin Leach, Snell & Wilmer L.L.P., Orange County, CA

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