The legal term “independent contractor” has become common parlance in recent years, as the gig economy and digital platforms have shaped how people work, how businesses are operated, and how individuals and organizations procure a variety of services, including product delivery, car rides, and even writing of briefs. Though perhaps less mainstream newsworthy, the concept of “joint employment” has also gripped swaths of the ever-growing contingent workforce and the millions of workers who keep fast-food chains open at all hours.

In both arenas, the fundamental questions of who is an “employee” and who is an “employer” have become increasingly important and often are hard to answer. The intersection of state and federal law, agency decisions that have been reversed multiple times, and dramatic changes to state law presents a challenge. Lawyers representing workers and employers or serving as in-house counsel must stay apprised of the law to keep firm footing on this rapidly shifting ground.

Changes to the Independent Contractor Tests

Workers’ classification as either employees or independent contractors has a significant effect on how they are taxed and on the rights they have under federal and state law, including whether those workers are entitled to minimum or overtime wages, worker’s compensation, unemployment insurance, and legal protection from discrimination. The tests for determining whether a worker is an employee or a true independent contractor vary based on the law applied.

Federal Law

Courts applying federal laws such as the Fair Labor Standards Act (FLSA) often use the “economic realities” test to determine employment status.¹ This is a balancing test that considers six factors:

1. the nature and degree of the employer’s control as to the manner in which the work is to be performed,

2. the alleged employee’s opportunity for profit or loss depending on his or her managerial skill,

3. the alleged employee’s investment in equipment or materials required for the task or his or her employment of other workers,

4. whether the service rendered requires a special skill,

5. the degree of permanency and duration of the working relationship, and

6. the extent to which the service rendered is an integral part of the alleged employer’s business.

The U.S. Court of Appeals for the Seventh Circuit uses the economic realities test. In the recent Simpkins v. DuPage Housing Authority decision, the court reaffirmed that the economic reality of the relationship between the worker and the putative employer is dispositive of whether an employment relationship exists, holding that in this case, in which the putative employer assigned the worker to specific projects and told him the order in which those projects were to be completed, this level of control signified an employment relationship.² In Perez v. Super Maid LLC, the district court applied the economic realities test to determine that individuals who did housekeeping tasks for a cleaning company were employees entitled to minimum wages and overtime, observing that workers are “more likely to be employees if they perform the primary work of the alleged employer.”³

An employer might protest that the workers agreed that they were independent contractors and not employees or require workers to sign a contract to that effect. But courts, including the Seventh Circuit, have held that an agreement is not dispositive of determining whether a worker is an employee.⁴ Such an agreement is not dispositive because an employee cannot prospectively or retrospectively waive rights under federal law such as the FLSA or the National Labor Relations Act (NLRA), because doing so would undermine the law’s purpose.⁵

In April 2019, the U.S. Department of Labor’s Wage and Hour Division (WHD) issued an opinion letter concerning the economic realities test and the gig economy. The letter concerns a “virtual marketplace company,” an app that matches customers with service providers classified as independent contractors.⁶ The WHD applied the economic realities test, noting that the company does not interview or train the service providers who sign up to offer services through the app; the company sets prices; and service providers can reject jobs, work for other companies, and set their own schedules. Based on these factors, the WHD determined the service providers were not the company’s employees. Though the gig economy seems to present new challenges for businesses, the general tests for the application of federal laws remain the same.

But businesses should note that even when a worker is an independent contractor, some federal laws still grant them protections. For example, in a 2019 U.S. Supreme Court decision, New Prime Inc. v. Oliveira, a trucking business’s attempt to enforce an arbitration agreement with its independent-contractor owner-operators was defeated when the Supreme Court held that the Federal Arbitration Act’s provision exempting “contracts of employment of … workers engaged in foreign or interstate commerce” applied not only to employee-employer contracts but also to contracts involving independent contractors.⁷

State Law

In Wisconsin, different statutes use different definitions of “employees.” Under the wage payment laws⁸ that grant minimum wage, overtime wage, and wage payment protections, courts use a “right to control” test, examining an employer’s control over a worker to determine whether those workers are employees.⁹

The Wisconsin Fair Employment Act (WFEA) uses the “economic realities test” to determine whether a worker is a covered employee.¹⁰ For the purposes of unemployment insurance, Wisconsin courts have noted, “the fact that the owner-operators may be independent contractors under the common law does not necessarily bar them from being employees under the act.”¹¹

Finally, Wisconsin’s worker’s compensation law provides that “independent contractors” are not employees for the purposes of the Worker’s Compensation Act only if nine statutory factors are met.¹² This statutory test, not the common-law test, is the proper one for determining liability under the statute.¹³ Because of these differing tests, a worker may be considered an employee for the purposes of one Wisconsin law but not another.

Because of these differing tests, a worker may be considered an employee for the purposes of one Wisconsin law but not another.

The laws concerning the definition of employee in other states, most prominently California, are in flux. In 2018, the California Supreme Court adopted the “ABC” test for determining employment status in California. The ABC test focuses on three factors: whether 1) the worker is free from control and direction of the hiring entity in performing the work (A); 2) the work is outside the usual course of the hiring entity’s business (B); and 3) the worker is customarily engaged in an independently established trade or business of the same nature as the work performed for the hiring entity (C).¹⁴

Dynamex concerned the classification of delivery drivers as independent contractors and is seen as a direct challenge to businesses such as Uber and Postmates, which classify drivers as independent contractors. In September 2019, California enacted Assembly Bill 5, which codified the ABC test.¹⁵ The law will go into effect in January 2020, but how businesses that currently hire a large number of independent contractors will respond remains to be seen.

Other states are weighing legislation that relates to independent contractor status. For example, Oregon is considering a bill that would limit those workers who could qualify as independent contractors,¹⁶ and a proposed Texas bill explicitly states that drivers for ride-hailing apps are independent contractors and not employees.¹⁷ Lawyers can expect more developments in laws of this type as California’s law takes effect and other states consider whether to adopt other changes in light of the changing economy.

What Is Joint Employment?

Joint employment refers to a situation in which two entities are both legally considered one employee’s employer. Often, joint employment questions arise when an individual is clearly an employee vis-à-vis one entity, while another entity either exercises (or has the right to exercise) control over the employee’s terms and conditions of employment.

For example, in the context of businesses that contract with staffing agencies to secure part of their workforce, are these workers employed by the agency that handles their payroll or by the business where they spend eight hours each day? As another common example, does a business engaging a general contractor to do a project also employ that contractor’s “boots on the ground”? And – a question that affects millions of workers in America – does a franchisor such as McDonalds “employ” its franchisees’ workers?

The answers to these questions have significant legal implications for both the business and the worker. Perhaps foremost, any employer (including a joint one) must comply with federal, state, and local employment laws as to all of its employees. A joint employer can be held substantively liable for violations of those laws with respect to the jointly employed employee.

Standards Applicable to Joint Employment Also in Flux

As with independent contractor tests, the answer to the question whether two entities are joint employers depends on who is asked and when the question is posed. This article focuses on two federal agencies whose foray into the joint employment debate has shaken up the employment law world and whose last word (for now) is expected soon.

National Labor Relations Board Debates Whether Right to Control Is Enough. The National Labor Relations Board (NLRB), which is responsible for enforcing the NLRA, long applied a two-step inquiry that looked at whether 1) two businesses shared or codetermined the terms and conditions of workers’ employment; and 2) the putative joint employer meaningfully affected the workers’ situation, such as by hiring, firing, issuing discipline, and supervising and directing their work.¹⁸ “Limited and routine” supervision exercised even on a daily basis was insufficient.¹⁹ The NLRB’s standard came to be understood as requiring an entity to have “direct” and “immediate” control to be liable to employees for violations of the NLRA or to be required to collectively bargain about the terms and conditions of their employment.²⁰

But in 2015, the NLRB introduced a new test under which an entity’s reserved right to control the terms and conditions of workers’ employment – even if not exercised – may suffice. The so-called BFI test²¹ rocked the business and employment law world as a significant departure from the prior requirements of direct and immediate control.

According to the NLRB, the new test was warranted because the direct-control test was “increasingly out of step with changing economic circumstances,” particularly the growth in contingent employment relationships. Instead, the BFI test focused on whether a common-law employment relationship exists, and, if so, whether the putative joint employer possesses sufficient (even if “reserved”) authority to permit collective bargaining. In essence, the BFI test made a finding of joint employment more likely than it had been in more than three decades.

Not for long. The NLRB reversed course about two years later, finding that the BFI decision was “ill advised” and prevented the agency from “fostering stability in labor-management relations.”²² But the reversal itself was short-lived; the decision overturning BFI was vacated in 2017 because of a deciding member’s conflict of interest. BFI was back, and ultimately, in December 2018, the U.S. Court of Appeals for the D.C. Circuit upheld BFI’s finding that “reserved authority to control and indirect control can be relevant factors in the joint employer analysis.”²³ Although the court partially remanded the decision, finding the NLRB failed to explain what constitutes indirect control over the essential terms and conditions of employment, the right to control currently may be considered in determining if an entity is a joint employer for purposes of the NLRA.

However, a new rule from the NLRB may be imminent. The NLRB issued its own proposed rule, involving two elements, that seeks a return to the pre-BFI era.²⁴ First, the employers must share or determine together the employees’ essential employment terms and conditions (such as hiring, firing, discipline, supervision, and direction). Second, the putative joint employer must possess and actually exercise substantial, direct, and immediate control over these terms and conditions in a manner that is not limited and routine. The comment period ended on Feb. 11, 2019, and the rule is expected to be finalized in 2019.

Department of Labor’s New Rule.The DOL has also recently stepped into the joint employment debate. The DOL does not have rulemaking authority when it comes to joint employment, so the agency’s pronouncements on joint employment are considered “interpretive guidance” for courts addressing the question of joint employment under the FLSA. A finding that two or more entities are joint employers under the FLSA has substantial legal consequences: Employees’ hours worked can be aggregated, which may trigger overtime obligations, and the joint employers are jointly and severally liable for FLSA compliance.

The DOL’s current regulations on joint employment have remained unchanged since 1958. In 2016, the DOL issued an administrator’s Interpretation that updated the approach to looking at joint employment relationships,²⁵ but it was promptly withdrawn after the election of Donald J. Trump. Then, in April 2019, the DOL proposed replacing the dated standard with a balancing test. Under this test, four factors would be considered: Does the putative joint employer

• Hire or fire the employee,

• Supervise and control the employee’s work schedules or conditions of employment,

• Determine the employee’s rate and method of payment, or

• Maintain the employee’s employment records?

Interestingly, the DOL’s notice of proposed rulemaking addresses some commonly argued facets of joint employment. For example, the proposal states that economic dependence is not determinative, reserved contractual authority or power is not relevant, and franchisor-franchisee relationships or certain business practices (such as providing a sample handbook or requiring equal opportunity policies in another entity’s workplace) do not make joint employer status more or less likely.²⁶ The comment period ended June 25, 2019, and so lawyers should also be on the lookout for the DOL’s rule.

Conclusion

A worker’s employment status and an entity’s status as a joint employer both come with significant legal obligations. As a result, whether workers and businesses fall into these categories sparks much debate. Lawyers can expect that both the independent contractor and joint employment questions will continue to be hotly contested through litigation, changes by federal agencies, and state-level litigation.

Endnotes

¹ U.S. Dep't of Labor v. Lauritzen, 835 F.2d 1529, 1534 (7th Cir. 1987).

² 893 F.3d 962 (7th Cir. 2018).

³ 55 F. Supp. 3d 1065, 1078 (N.D. Ill. July 14, 2014).

⁴ Simpkins v. DuPage Hous. Auth., 893 F.3d 962, 966-67 (7th Cir. 2018) (holding that existence of independent contractor agreement was not dispositive of economic realities of parties’ relationship and did not preclude recovery of overtime wages under FLSA).

⁵ D.A. Schulte Inc. v. Gangi, 328 U.S. 108, 114 (1946).

⁶ www.dol.gov/whd/opinion/FLSA/2019/2019_04_29_06_FLSA.pdf.

⁷ 139 S. Ct. 532.

⁸ Wis. Stat. chs. 103, 104, 109.

⁹In re FedEx Ground Package Sys., Empl. Practices Litig., 273 F.R.D. 424, 450-51 (N.D. Ind. 2008); Madison Newspapers Inc. v. Wisconsin Dep’t of Revenue, 228 Wis. 2d 745, 599 N.W.2d 51 (Ct. App. 1999). But see also Labor Standards – “Worker Classification,” (six-factor “economic realities test.”).

¹⁰ Moore v. LIRC, 175 Wis. 2d 561, 569-70, 499 N.W.2d 288 (Ct. App. 1993).

¹¹ Stafford Trucking Inc. v. DIHLR, 102 Wis. 2d 256, 306 N.W.2d 79 (Ct. App. 1981).

¹² Wis. Stat. § 102.07(8) (listing factors).

¹³ Hurt v. Cole, No. 2013AP2339, 2014 WL 3056165 (Wis. Ct. App. July 8, 2014) (unpublished limited precedent opinion).

¹⁴ Dynamex Ops. W. v. Superior Court, 416 P.3d 1 (Cal. 2018).

¹⁵ http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201920200AB5 (last visited Oct. 10, 2019).

¹⁶ https://olis.leg.state.or.us/liz/2019R1/Measures/Overview/HB2498 (last visited Oct. 10, 2019).

¹⁷ https://capitol.texas.gov/tlodocs/85R/billtext/html/HB00100F.htm (last visited Oct. 10, 2019).

¹⁸ Laerco Transp., 269 NLRB 324, 325 (1984).

¹⁹ TLI Inc., 271 NLRB 798, 799 (1984).

²⁰ See Airborne Express, 338 NLRB 597 (2002); AM Property Holding Corp., 350 NLRB 998 (2007).

²¹ Browning-Ferris Indus. of Cal. Inc., 362 NLRB No. 186 (2015) (BFI).

²² Hy-Brand Indus. Contractors Ltd., 365 NLRB No. 156 (2017).

²³ Browning-Ferris Indus. of Cal. Inc. v. NLRB, 911 F.3d 1195, 1222 (D.C. Cir. 2018).

²⁴ See 83 Fed. Reg. 46,681 (Sept. 14, 2018).

²⁵ Administrator's Interpretation No. 2016-1, Joint employment under the Fair Labor Standards Act and Migrant and Seasonal Agricultural Worker Protection Act. See U.S. DOL, WHD, Administrator Interpretations Letter - Fair Labor Standards Act, (last visited Oct. 13, 2019).

²⁶ See 84 Fed. Reg. 14,043.