Under the Fair Labor Standards Act (FLSA), any person or entity that had the right to control the terms and conditions of an employee’s employment duties and exercised those duties, would be lumped in with the ‘employer’ for liability purposes in unpaid overtime cases. Think of a class action with multiple plaintiffs, statutory damages, and attorney’s fees. Think of the financial pain of being caught in an overtime violation. Outsource placement companies thought they could avoid being lumped in with the employer because all they did was select appropriate employees for their clients, and really did not exercise the right of control. But didn’t the act of selecting and deeming the qualification of personnel to work at a particular job site or for a client indicate some level of control? The Feds also scratched their heads on this one, and from up on high came the Browning-Ferris decision. This decision is, at least for now, only an administrative decision, but one that may soon be adopted by federal courts.
The Golden Standard for Employer Liability
On August 27, 2015, the National Labor Relations Board revised the standards for determining joint employer status. The decision, involving Browning-Ferris Industries of California (“BFIC”), significantly impacts any business model that relies heavily on outsourcing employees or franchising.
The Board reaffirmed long-standing principles used to determine whether multiple entities are joint employers: whether (1) the multiple entities are employers within the meaning of the common law, and (2) they share or codetermine matters governing the essential terms and conditions of employment. The Board added a new wrinkle, however. Prior to the BFIC decision, the Board required that a joint employer not only possess the authority to control employees’ terms and conditions of employment, but that it also exercise that authority.
The Ability to, not Actual Exercise of Control, Yields Liability. OK . . . What?
The BFIC decision significantly departed from that standard, stating that “reserved authority to control terms and conditions of employment, even if not exercised, is clearly relevant to the joint-employment inquiry” [emphasis added]. In other words, even if a business does not exercise direct control over the terms and conditions of employment of outsourced employees, if it reserves the right to do so, it is enough to support a finding of joint employment. It is also apparent that retention of indirect control is enough to meet this standard. In the BFIC case, the outsourcing firm was responsible for recruiting, interviewing, testing, selecting, and hiring personnel to work in BFIC’s facility. Nonetheless, BFIC’s contract required the outsourcing firm ensure that personnel hired have appropriate qualifications “consistent with all applicable laws and instruction” from BFIC to perform the general duties of the assigned position, and that BFIC had the right request that persons hired “meet or exceed” BFIC’s “own standard selection procedures and tests.” Stated succinctly, determining employment qualifications can impose joint employer liability on a business that outsources its employment. Other factors, such as discipline and termination, scheduling of hours, wages and benefits, and training and safety, played into the decision as well.
The ultimate key to the decision was the degree of indirect and direct control BFIC possessed over the outsourced employees, whether the employer exercised control over terms and conditions of employment indirectly through an intermediary, or had reserved the authority to do so. As expected, the 3-2 decision broke evenly across party lines, with the three Democratic board members in the majority.
Outsourcing and Franchisor Dragged In
The ruling has significant ramifications for employers who rely heavily on outsourcing firms to manage its workforce and franchisors. Employers who rely on outsourcing still generally determine the terms and conditions of employment, requiring certain qualifications for employees. While previously an employer could stand back and point to the outsourcing firm as the “true” employer, despite defining many of the terms and conditions of employment, this is not so after the BFIC decision.
We see this decision affecting various industries, including franchisors. The application of this new rule will depend largely upon the degree of control franchisors place on their franchisees. Franchisors who closely regulate the conditions of its franchisees’ employment practices may find themselves subject to joint employer liability, while those franchisors who are less stringent may not. The decision could pose particular problems for large entities such as McDonald’s, which strictly regulates the activities of its franchisees at many levels to preserve product and service quality. McDonalds is, in fact, currently litigating joint employer status before the NLRB. The BFIC decision does not bode well for the fast food giant.
You Really Need to Call VLF
Employers and outsourcing companies may “want it their way,” but the BFIC decision may create greater liability for various companies that insist on which employee is hired, why they are hired and how they work.
Talk to the business lawyers and employment attorneys of the Vethan Law Firm, P.C., now with offices in Houston, San Antonio and Dallas to discuss how your company handles employee matters and placement issues. Visit our web page at www.vethanlaw.com