New definitions could spell trouble ahead

In response to evolving models for engaging contingent (non-permanent) workers, the Fair Labor Standards Act has issued new definitions of employer and employee that go far beyond the traditional common law right of control test. The FLSA now defines two extremely broad categories of co-employment: horizontal and vertical. Is your organization at risk?

Read The Full Story

A shift in staffing models

These recent changes come in response to the fact that organizations are moving towards new and different ways of engaging with workers. To quote WHD administrator David Weil, “More and more, businesses are varying organizational and staffing models by, for instance, sharing employees or using third-party management companies, independent contractors, staffing agencies, or labor providers”. This is what is increasingly referred to as the Flexible Workforce.

A broader definition of employment

The Fair Labor Standards Act (FLSA) has greatly expanded the definitions of both who is an employee and who is an employer. According to the January 2016 administrator’s interpretation, the FLSA now defines employment in the broadest of terms, including “to suffer or permit to work”. The “suffer or permit” definition of employment is “the broadest definition that has ever been included in any one act.”

According to the interpretation, the FSLA’s definitions are “comprehensive enough to require its application to many working relationships which, under the common law control standard, may not be employer-employee relationships.”

The consequence of this definition for businesses working with independent contractors and contingent or non-permanent workers is an increased risk of misclassification and co-employment claims.

Now more than ever the relationships between you and your independent contrators and contingent workers need to be very carefully examined and managed accordingly. As several industry analysts suggest, it is preferable to err on the side of caution by classifying any gray area workers as employees.

DOL guidance on co-employment

In the January 2016 guidance, the DOL issued a new definition of joint-employer status under the FLSA. This new and broader definition of employer and employee goes far beyond the traditional common law right of control test and defines two broad categories of joint employment – horizontal and vertical.

Horizontal co-employment

Horizontal joint employment analysis focuses on the relationship between two or more employers. Essentially, a horizontal joint employment relationship exists when a worker is retained by two or more “sufficiently associated or related employers with respect to the employee”. Examples of this might include a worker who is employed at two locations of the same restaurant brand, franchise, hotel, etc., or home healthcare providers that share the same staff and have common management.

Of particular interest is the fact that all related employers are jointly and severally responsible for compliance with the FLSA. Hours worked for each employer would be combined for the purpose of calculating overtime pay, for example.

Some of the factors considered to establish horizontal co-employer status include:

• Ownership of the businesses;
• Overlapping officers, directors, executives or managers;
• Shared control over operations such as hiring, firing, payroll, advertising, etc.;
• Intermingled operations (shared administration, for example);
• Supervision by one employer over the other;
• Shared supervisory authority for the employee;
• Shared clients or customers;
• Agreements existing between the employers.

Vertical co-employment

Vertical co-employment analysis, on the other hand, examines situations where there is an employment relationship with one employer, but economic realities show that the worker is economically dependent on another employer.

According to the Guidance, “the vertical joint employment analysis must be an economic realities analysis and cannot focus only on control”. This definition specifically targets workers provided by staffing agencies, labor contractors, subcontractors and other intermediaries.

The vertical  co-employment analysis will focus on factors such as:

• Direction, control or supervision of the work performed;
• Controlling employment conditions;
• Permanency and duration of the relationship;
• Nature of the work being repetitive and rote;
• Performance of work that is an integral part of the business;
• Performance of work on premises owned or controlled by the employer;
• Performance of administrative functions commonly performed by the employer.

Are you at risk?

A careful examination of the nature of your relationship with your flexible workforce will help you determine if you are in a situation of co-employment. Should you be exposed, appropriate steps can be taken to mitigate the risk. It then becomes essential that the governance and management of your flexible workforce are tightened up to ensure that your exposure to risk is minimal. 

Unsure of how to manage your contingent workforce relationships to avoid co-employement risks? Speak with one of our contingent workforce consultants. Click here to arrange a call.

Related content

Employee misclassification crackdown gains momentum