Monthly Archives: August 2015

August 28, 2015

NLRB Throws Out Years of Joint-Employer Precedent – Adopts Two-Part Test For Joint-Employer Status

The National Labor Relations Board (NLRB or Board) has thrown employers a curve by overruling 30 years of long-standing decisions that narrowed the circumstances under which a joint-employer relationship could be found to exist. In a closely-watched decision, the Board revised its joint-employer standard, dictating a broader two-step test that will result in entities that use contingent workers more likely being deemed joint employers for union representation purposes. Browning-Ferris Industries of California, Inc., 362 NLRB No. 186 (Aug. 27, 2015).

Two-Part Joint Employer Test

In its 3-to-2 decision, the Board reaffirmed a 1982 joint-employer standard under which the Board will find that two or more statutory employers are joint employers of the same employees if they share or codetermine the essential terms and conditions of employment. First, the Board will determine whether the putative employer has a common-law employment relationship with the employees in question. If that relationship exists, the Board then will determine whether the employer possesses sufficient control over the employees’ essential terms and conditions of employment to permit meaningful collective bargaining.

Employer Need Not Exercise Control Over Employees

Over the past 30 years, joint-employer cases have defined the degree of control that an employer must assert over the workers to be deemed a joint employer. Those cases, including Laerco and TLI, required that the putative employer actually exercise control over the terms and conditions of employment to be deemed a joint employer. In addition, exercising that control had to be direct and immediate, not of a limited and routing nature. Simply possessing the authority to exercise control, without actually exercising that control, was not enough under long-standing Board law.

That requirement is now gone. The Board ruled, in Browning-Ferris, it will no longer require that a joint employer exercise its authority to control the terms and conditions of the employees’ employment. The proper inquiry will be whether the statutory employer “possesses sufficient control over the work of the employees to qualify as a joint employer with” another employer. In addition, control exercised indirectly, such as through an agent or intermediary, may be sufficient to establish joint-employer status.

BFI Deemed A Joint Employer With Temp Agency

After articulating its revised test, the Board applied it to the BFI case at hand. The case arose after a union sought to include certain workers at the BFI Newby Island Recyclery in a bargaining unit during a union election. The workers were employed by Leadpoint Business Services, a temporary labor services agency, and were assigned to work at BFI’s recycling plant as sorters, screen cleaners and housekeepers. The contract between BFI and Leadpoint specifically stated that Leadpoint was the sole employer of the workers and there was no employment relationship between BFI and those workers.

The Board concluded that BFI was a joint employer of the workers with Leadpoint. Contributing factors leading the Board to determine that BFI is a common-law employer and shares or codetermines essential terms and conditions of employment include:

BFI retained the right to require that Leadpoint meet or exceed BFI’s own standard selection procedures and tests, requires drug tests and prohibits Leadpoint from hiring workers deemed to be ineligible for rehire by BFI;
BFI retained the right to reject any worker that Leadpoint refers to its facility “for any or no reason” and to discontinue the use of any personnel that Leadpoint assigned to it;
BFI managers had requested the immediate dismissal of certain workers due to misconduct and Leadpoint dismissed them from BFI’s facility shortly afterward;
BFI controlled the speed of the material streams and specific productivity standards for sorting;
BFI managers assigned specific tasks that need to be completed, determined where workers are to be positions and exercised near-constant oversight of workers’ performance;
BFI identified the number of workers it needs, the timing of the shifts and when overtime is necessary, even though Leadpoint selects the specific employees who will do the work;
Despite Leadpoint determining pay rates, administering payroll and benefits and retaining payroll records, BFI prevented Leadpoint from paying employees more than BFI employees in comparable jobs and used a cost-plus model under the contract;
After a new minimum wage law went into effect, BFI and Leadpoint entered into an agreement for BFI to pay a higher rate for the services of Leadpoint employees.

As a result of finding that BFI was a joint employer of these workers, the Board ordered the Regional Director to open and count the impounded ballots cast by the employees in the petitioned-for unit. If the employees voted for union representation, BFI will have to collectively bargain over the terms and conditions of employment over which it retains the right to control.

Implications For Employers

The Board seeks to prevent companies from insulating themselves from the application of labor laws by using temporary or other contingent workforces and this new standard will further their goal. This new, broader standard for joint-employer status will make it easier for unions to include contingent workers into bargaining units at the facilities for which they are providing services. In addition, as pointed out by the dissent, this change “will subject countless entities to unprecedented new joint-bargaining obligations that most do not even know they have, to potential joint liability for unfair labor practices and breaches of collective-bargaining agreements, and to economic protest activity, including what have heretofore been unlawful secondary strikes, boycotts and picketing.”

If your organization uses contingent workers, you should review your existing labor services agreements and, to the extent possible, renegotiate any terms that reserve your right to control the terms and conditions of the contingent workers’ employment. You also should attempt to eliminate any functional oversight and decision-making to ensure that you are not exercising any control, whether directly or indirectly, over the contingent workers. The reservation of the right to dictate any terms or conditions of employment, or the actual exercise of that control in any way, is likely to lead you to be deemed a joint employer of those workers.

We will keep you posted of further developments, including any appeals of this decision.

Click here to print/email/pdf this article.

August 24, 2015

Home Care Workers Entitled to Minimum Wage and Overtime

By Mark Wiletsky

Agencies that provide companionship or live-in care services for the elderly, ill or disabled will now have to pay their home care workers minimum wage and overtime pay under the Fair Labor Standards Act (FLSA). Reversing a lower court decision, the Court of Appeals for the District of Columbia upheld the Department of Labor’s (DOL’s) new regulations that removed those employees from the “domestic service” exemption. The Court also struck down the challenge to the DOL’s revised definition of companionship services that now places a duty restriction on workers who may be considered exempt.

Extension of FLSA Protections Is Reasonable

For years, individuals who provide companionship or live-in care services were exempt from the minimum wage and overtime rules under the FLSA, even if those individuals were employed by a third party. In 2013, however, the DOL reversed its prior interpretation of the domestic service exemption, adopting new regulations stating that third-party employers of companionship-services and live-in employees could no longer use the exemption to avoid paying minimum wage and overtime pay to their home care workers. The new regulations also narrowed the definition of companionship services: a worker providing exempt services can spend no more than 20 percent of his or her total hours worked on the provision of care, including meal preparation, driving, light housework, managing finances, assistance with the physical taking of medications, and arranging medical care.

Before the new rules went into effect, trade associations representing third-party agencies that employ home care workers challenged the DOL’s new regulations in court and the district judge declared them invalid. The lower court ruled that the DOL’s decision to exclude a class of employees from the exemption because they were employed by a third-party agency contravened the plain terms of the FLSA. The court also threw out the DOL’s revised definition of companionship services, with its 20 percent limit on care-related tasks, as contrary to both the text and intent of the statutory exemption.

On August 21, 2015, the Circuit Court of Appeals for the District of Columbia disagreed and upheld the new regulations. The appellate court found that the FLSA exemption did not specifically address the third-party employment question and therefore, the DOL had the authority to create rules and regulations to fill in the gap.

The court also determined that the DOL’s new interpretation was “entirely reasonable.” The DOL explained that its change in policy was due to the change in the market for home health care. In the 1970’s, professional care for the elderly and disabled was primarily provided in hospitals and nursing homes so that services in the home were largely that of an “elder sitter” or companion. More recently, however, individuals needing a significant amount of care were now receiving that care in their own homes, provided by professionals employed by third-party agencies rather than by workers hired directly by care recipients or their families. These changes, as well as Congress’s intent to bring more workers within the FLSA’s protections, convinced the court that the DOL’s changed interpretation was reasonable.

Potential Adverse Effects of FLSA Coverage Unfounded

The third-party agencies challenging the DOL’s regulations argued that requiring minimum wage and overtime pay for home care workers would raise the cost of their services, making home care less affordable and creating a “perverse incentive for re-institutionalization of the elderly and disabled.” The DOL countered by pointing to fifteen states where minimum wage and overtime protections already extend to most third-party-employed home care workers and noted that there was no reliable data that these pay protections led either to increased institutionalization or a decline in the continuity of care. The DOL also cited the industry’s own survey that indicated that home care agencies operating in those fifteen states had a similar percentage of consumers receiving 24-hour care as those agencies in non-overtime states.

The DOL further argued that the new rules would improve the quality of home care services, thus benefitting consumers, because the revised regulations would result in better qualified employees and lower turnover. It would also reflect the reality that home care workers employed by third-party agencies are professional caregivers, many of whom have training or certifications, who work for agencies that profit from their employees’ services. The appellate court found the DOL’s position reasonable, upholding its regulations.

No Standing to Challenge Narrowed Definition of Companionship Services

By ruling that the third-party agencies could not use the domestic services exemption, the court removed the ability of those agencies to use the companionship services definition to exempt home care workers from minimum wage and overtime protections. As a result, the trade associations’ members challenging the new, narrowed definition of companionship services would not be directly harmed by the revised definition. Because they would not suffer any injury from the narrowed definition, the challengers lacked standing to oppose the revision, denying the court of jurisdiction to resolve that issue. Consequently, the court ordered that judgment be entered in favor of the DOL.

Practical Effect for Home Care Employers

Pending any appeals, the DOL’s new regulations removing the ability of third-party home care agencies to exempt their home care workers from FLSA minimum wage and overtime pay will go into effect. Employers of home care workers should take steps now to ensure that they comply with the FLSA minimum wage requirement for all hours worked as well as paying an overtime premium for all hours worked over 40 per week. In addition to updating your pay practices, be sure to revise any affected policies and statements in your employee handbook, operational manual, timekeeping procedures, job advertisements and recruiting materials.

Click here to print/email/pdf this article.

August 18, 2015

NLRB Unanimously Declines Jurisdiction Over Northwestern University Football Player Union Petition

By Steve Gutierrez

The National Labor Relations Board (NLRB or Board) declined to assert jurisdiction over the petition filed by a union seeking to represent Northwestern University’s scholarship football players. In 2014, the Regional Director for the Region covering Northwestern University found that Northwestern’s football players who received grant-in-aid scholarships were employees within the meaning of the National Labor Relations Act (NLRA or Act) and were entitled to petition for union representation. In its unanimous decision announced yesterday, the Board dismissed that union petition, deciding that it would not assert jurisdiction over these specific college athletes as doing so would not promote stability in labor relations or further the purposes of the Act.

Board Refuses to Decide Whether College Athletes Are Statutory Employees

After considering the positions of the union seeking to represent Northwestern’s football players, the University, who contended that its scholarship players were not statutory employees, and the many interested parties who submitted briefs, the Board refused to decide the controversial issue raised by the Regional Director’s 2014 decision, namely whether Northwestern’s grant-in aid scholarship football players are employees under the NLRA. Instead, by refusing to assert jurisdiction, the Board dismissed the union’s petition to represent this group of college athletes, effectively nullifying the impounded ballots that had been cast in the union election in April 2014.

Single Team Athletes Unlike Other Covered Cases

The Board distinguished this group of athletes from other types of students and athletes for which the Board has asserted jurisdiction. First, the Board focused on the nature of the college sports leagues and structure of college football bowl divisions. It noted that the National Collegiate Athletic Association (NCAA) and the Big Ten Conference (to which Northwestern University belongs) dictate eligibility requirements, minimum academic standards, scholarship terms, amateur status, mandatory practice hours and other rules under which the scholarship athletes may compete. The Board saw these rules as distinguishing the scholarship players from graduate student assistants or student janitors and cafeteria workers whose employee status the Board had considered in other cases.

The Board then distinguished Northwestern’s scholarship players from professional sports leagues, which are covered by union contracts. Previous Board cases involving professional sports have involved leaguewide bargaining units that cover all players across the league. Here, the union sought to represent players from a single team. The Board cannot assert jurisdiction over the majority of colleges and universities that make up the college football divisions as the vast majority are public institutions which are not employers under the Act. Consequently, the Board could not assert jurisdiction over most of Northwestern’s primary competitors. The Board found that asserting jurisdiction over a single team, rather than across an entire league, would not promote stability in labor relations.

Rare Limit On Board’s Reach

In recent years, the Board has extended its reach, offering NLRA protections in expansive ways and revising rules to make it easier for unions to win elections. Today’s ruling is a rare exception to that expansive trend, curtailing the reach of the NLRA to the scholarship football players at a private university. The Board did, however, express the limited nature of this decision, noting that changed circumstances may prompt a reconsideration of this issue in the future. We’ll have to wait to see if unions try again to organize scholarship athletes under different conditions.

August 11, 2015

Misclassification of Independent Contractors Under Increased Scrutiny

By A. Dean Bennett

The Idaho Department of Labor is stepping up efforts to identify companies that misclassify employees as independent contractors. It recently signed a memorandum of understanding with the U.S. Department of Labor to work together to help prevent the misclassification of workers. In doing so, Idaho joins 23 other states who have signed similar agreements, including Alabama, California, Colorado, Connecticut, Florida, Hawaii, Illinois, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, New Hampshire, New York, Rhode Island, Texas, Utah, Washington, Wisconsin and Wyoming.

Why Focus on Independent Contractor Status?

Federal and state labor agencies care whether workers are classified as employees rather than independent contractors because the classification can determine whether the individual is entitled to important workplace benefits and protections. Many employment laws, such as those governing minimum wage and overtime pay, meal and break periods, family and medical leave, workers’ compensation, unemployment compensation, employment taxes and anti-discrimination, apply only to employees, not independent contractors. Consequently, if an employee is misclassified as an independent contractor, he or she misses out on the protections and benefits provided by such laws.

Another reason cited by David Weil, Administrator of the U.S. Department of Labor Wage and Hour Division, is that employers who follow the law by properly classifying workers as employees often cannot compete on a level playing field with employers who misclassify their workers as independent contractors. Companies who misclassify workers often avoid the added costs of properly paying, insuring and withholding employment taxes for workers who should be treated as employees. According to the DOL, this lower cost of utilizing independent contractors may give non-compliant companies an unfair advantage in the marketplace. For these reasons, remedying misclassifications is at the forefront of the agencies’ enforcement efforts.

What’s At Stake For You?

Companies that misclassify employees as independent contractors face substantial liability. Ken Edmunds, Director of the Idaho Department of Labor, suggests that even though businesses often use independent contractors because they think it will save them money, in the end, misclassifications can cost them “a whole lot more,” with the potential for severe monetary fines and even criminal charges.

The Internal Revenue Service (IRS) and state tax entities will pursue back taxes with interest based on the employer’s failure to withhold income taxes and make FICA contributions. Employers also remain liable for unemployment taxes related to the misclassified workers. In addition to the back taxes, employers may face criminal and civil penalties.

Employers also face wage claims for unpaid overtime pay that would have been due to the worker if properly treated as an employee. If the misclassified individual was denied leave under the FMLA or participation in a group benefit plan, the employer may face claims under those respective laws. Failure to complete I-9 forms or other employment eligibility requirements may result in additional liability. In short, you may become liable for failing to comply with or offer any benefit or protection that was denied to the individual because of the misclassification.

What Should You Do?

If your company uses independent contractors in your workforce, take steps now to audit whether those workers meet the tests for independent contractor status. Remember, you do not escape liability if the individual asks or agrees to be treated as an independent contractor. You must analyze whether the individual meets the requirements for that classification.

Although numerous factors go into determining whether a worker is an independent contractor, the Idaho Department of Labor lists two criteria that must be met:

The worker must be free from the right of direction or control in performing work, both under a contract of service and in fact; and
The worker must be engaged in an independently established trade, occupation, profession or business.

A fact sheet titled “Independent Contractor or Employee?” provides additional detail to help you determine the proper classification of workers and is available on the Idaho Department of Labor’s website. A similar fact sheet on Employment Relationships Under the Fair Labor Standards Act (FLSA) is available from the U.S. Department of Labor, Wage and Hour Division.

With both the federal and state labor departments stepping up efforts to audit companies to discover employee misclassifications, taking steps now to avoid the associated liability is warranted. It also will help your organization avoid costly lawsuits filed by independent contractors who missed out on overtime pay and other employee benefits.

Click here to print/email/pdf this article.

August 10, 2015

Dodd-Frank CEO Pay Ratio Disclosure Rules Approved

By Bret Busacker

On August 5, 2015, the SEC approved the final rules on the so-called “CEO pay ratio disclosure” under the Dodd-Frank Act. The CEO pay ratio disclosure will require most publicly traded companies (referred to below as a “registrant”) to disclose the ratio of CEO pay to the median income of all other employees of the registrant.

Companies must first begin providing the pay ratio disclosure for the first full fiscal year that begins on or after January 1, 2017. Accordingly, for most companies with a December 31 year-end, disclosure will first be required in the registrant’s 10-K filed in 2018 for the 2017 fiscal year or in the 2018 proxy statement for the 2018 shareholder meeting (so long as the proxy is filed within 120 days of the 10-K).

Here is a general summary of the CEO pay ratio disclosure requirements as well as an explanation of the more significant changes adopted as part of the final rule.

Note: The CEO Pay Ratio Rule uses the term PEO (Principal Executive Officer) in lieu of CEO. We refer to the CEO below for simplicity.

General Overview of the CEO Pay Ratio Disclosure Rule

Who does the rule apply to? Registrants who are required to provide executive compensation disclosure pursuant to Item 402 of Regulation S-K must comply with the CEO pay ratio disclosure. Emerging growth companies, smaller reporting companies and foreign private issuers are not subject to the rule. Special transition rules apply to companies that become publicly traded or become subject to the rule as a result of a merger or acquisition.

Where must the CEO pay ratio be disclosed? Generally, wherever executive compensation disclosure is otherwise required under Item 402 of Regulation S-K. Accordingly, disclosure will be required on Form 10-K, proxy statements and registration statements that require executive compensation disclosure (but not in current reports or quarterly reports). The pay ratio disclosure is considered “filed” with the SEC instead of “furnished.” Accordingly, the disclosure is subject to the applicable liability provisions under Section 18 of the Exchange Act and Section 11 of the Securities Act.

How does the CEO Pay Ratio Rule work? The focus of the rule is to identify the employee with the median income of the registrant and its affiliates (excluding the income of the CEO) and compare the median income employee’s total annual compensation to the CEO’s total annual compensation. This means the registrant must establish a compensation list of all employees (other than the CEO) and their compensation levels and then determine which employee has the same number of employee compensation levels above and below him or her on that list. Once the median income employee is identified, that employee’s total annual compensation must be described in a ratio to the CEO’s annual total compensation for the same year using the proxy statement summary compensation table rules in Item 402(c) of Regulation S-K (“SCT Compensation”).

May a registrant use a simplified method to identify the median income employee? Yes. A registrant may use W-2 wages or other types of consistent compensation records to identify the median income employee. In addition, a registrant may use statistical sampling of its employees or other reasonable methods in identifying the employee with median income. Accordingly, a registrant could use a statistical sample of the W-2 wages of its employees to identify the median income employee. However, once the median income employee is identified, that median income employee’s compensation must be calculated using SCT Compensation (defined above) in order to actually report the CEO pay ratio disclosure in the proxy or Form 10-K.

Which employees must be considered in determining the median income employee? All full-time, part-time, and seasonal workers worldwide of a registrant (and its affiliates) must be considered in identifying the median income employee. However, as explained below, the final rule does allow a registrant to exclude a limited number of non-U.S. employees and provides the registrant some flexibility in determining the date used to determine the list of employees considered in identifying the median income employee.

How may the CEO pay ratio be described? The ratio may be described numerically (e.g., “the ratio of the median of the total annual compensation of all employees (other than the CEO) to that of the CEO is 1 to 268”) or narratively (e.g., “the CEO’s annual total compensation is 268 times that of the median annual total compensation of all employees”). Registrants must also describe the methodology, assumptions and estimates used in creating the ratio. The pay ratio disclosure may be supplemented with additional information at the discretion of the registrant so long as such additional information does not detract from the required pay ratio disclosure and is not otherwise misleading.

Significant Changes to the Final CEO Pay Ratio Disclosure Rule

The final CEO pay ratio disclosure rules include a number of changes from the proposed rules that will provide some flexibility in determining the median income employee.

A company may rely on the same median income employee determination to calculate the CEO pay ratio for as many as three years, so long as the registrant can reasonably determine that there has been no circumstance, such as a significant change in the number of employees of the registrant, that would require a new determination of the median income employee. If the median income employee identified in year one of the three-year reliance period changes positions, or is no longer employed by the registrant in years two or three of the reliance period, the registrant may identify a replacement median income employee with similar compensation.

A company may select any date within three months of the end of the registrant’s fiscal year to determine the registrant’s employees to be included in the median income employee determination. This date must be used consistently from year-to-year and the registrant must explain any change to the date selected in subsequent disclosure years.

A company may exclude from the median income employee calculation the non-U.S. employees whose compensation information is protected from disclosure by foreign data privacy rules. Non-U.S. employees may be excluded if they are located in a jurisdiction in which foreign data privacy laws would preclude disclosure of such employees’ compensation. To rely on this exclusion, the registrant must take reasonable steps to obtain a waiver from the foreign jurisdiction’s data privacy requirements, explain in the actual CEO pay ratio disclosure that the foreign data privacy exclusion was used, and obtain a legal opinion certifying that it is unable to comply with the foreign jurisdiction’s data privacy rules and that it was unable to obtain a waiver from the foreign jurisdiction’s data privacy rules.

A company may also exclude up to 5% of its employees who are non-U.S. employees so long as all employees of that same jurisdiction are excluded under the rule. Employees excluded from the median employee calculation under the foreign data privacy exclusion (described above) count against the number of employees that may be excluded under the general 5% exclusion. For example, if a registrant has excluded 4% of its employees of a jurisdiction in reliance on the data privacy exclusion, it may not exclude the employees in another foreign jurisdiction if the number of employees in that foreign jurisdiction exceed 1% of all employees of that registrant.

A company may use a cost of living adjustment to adjust the compensation of employees outside of the jurisdiction in which the CEO lives to determine the median income employee. If a cost of living adjustment is used to identify the median income employee, then such same cost of living adjustment must be used in calculating SCT Compensation as part of the actual CEO pay ratio disclosure. The cost of living adjustment method, the jurisdiction in which the median income employee resides, and a separate pay ratio comparison without the use of a cost of living adjustment must be included in the CEO pay ratio disclosure.

Only employees of a registrant and its consolidated subsidiaries, generally based on a 50% ownership threshold, will be included in the median income employee calculation.

Action Items

Although the CEO pay ratio disclosure is not required for more than two years, companies subject to the disclosure requirement should begin now to evaluate the best method of identifying the median income employee. Accordingly, registrants should consider the following:

Provide a summary of the final rule to the Board and/or compensation committee of the Board.
Identify any foreign jurisdictions in which data privacy laws may preclude the registrant from including employees of that jurisdiction in the CEO pay ratio disclosure calculations.
Determine whether non-U.S. employees may be excluded under the general 5% exclusion rule and determine which of those non-U.S. employees should be excluded.
Evaluate how the median income employee will be determined (i.e., based on SCT compensation, W-2, statistical sampling, etc.) and identify any limits or restrictions in collecting that information that may arise.
Begin to evaluate whether other disclosures may be appropriate to include with the CEO pay ratio disclosure to provide context and meaning to the CEO pay ratio disclosure.

Click here to print/email/pdf this article.