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 laws with respect to the employees at issue 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 on the hook for back pay, reinstatement or front pay, the litigation expenses of both the National Labor Relations Board (NLRB) General Counsel and the union, and injunctive relief (including notice posting requirements). 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, failure to provide rest breaks, failure to reimburse for expenses and inadequate wage statements. Recovery on certain wage claims includes recovery of reasonable attorneys’ 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, attorneys’ 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 attorneys’ fees and costs. Similarly, for employment tort claims, employees are generally entitled to recover the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not. This may include 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.
Joint Employer Litigation
Franchisor – Franchisee
Recently, the NLRB issued a number of administrative complaints against McDonald’s along with its franchisees on the grounds that the McDonald’s franchisor should be considered the joint employer of individuals working at its franchisee’s restaurants on claims of alleged retaliation against employees who participated in union organizing activities. The NLRB alleges that McDonald’s effectively controls key employee policies at its franchise restaurants exercising sufficient control over franchisee operations to make it a putative joint employer and share responsibility for violations of the National Labor Relations Act. Soon thereafter, this past month, 10 former restaurant workers sued McDonald’s and one of its franchisees alleging wrongful termination, asserting that they were fired because of their race or quit because of racial harassment.
Conversely, in August 2014, the California Supreme Court in Patterson v. Domino’s Pizza LLC, ruled that franchisor Domino’s was not responsible for sexual harassment allegedly committed by a supervisor at a franchise store. The court found that Domino’s did not automatically become a joint employer or responsible for its franchisee’s wrongdoing simply because it set brand standards for running franchise stores. The court held that “The imposition and enforcement of a uniform marketing and operational plan cannot automatically saddle the franchisor with responsibility for employees of the franchisee who injure each other on the job.” The court further found that there was enough evidence showing that the franchisee in the case retained control over day-to-day decisions involving the hiring, supervision and disciplining of the employees and that the franchisee owner imposed discipline based on his own personnel policies, declined to follow advice of the franchisor’s representative and neither expected nor sustained any sanction for doing so.
Parent – Subsidiary
The risks of joint employer allegations are not limited to the franchise context. In September 2014, a California Court of Appeal issued a decision in Castaneda v. Ensign Group, Inc. holding that a corporate parent could be found liable for its subsidiary’s failure to pay overtime and minimum wages. The court held that an “entity that controls the business enterprise may be an employer even if it did not ‘directly hire, fire or supervise’ the employees” and that the “basis of liability is the owner’s failure to perform the duty of seeing to it that the prohibited condition does not exist.” The specific factors looked at included, but were not limited to, that Ensign was the sole shareholder of Cabrillo (the subsidiary), as well as all other Ensign subsidiaries that performed corporate functions for Cabrillo; Ensign issued the paychecks to the employees at Cabrillo; Ensign was involved in recruiting employees for Cabrillo; Cabrillo’s management reported up to individuals at Ensign affiliates; Ensign had a centralized information technology, human resources, accounting, payroll, legal and risk management system for its affiliates, including Cabrillo; Cabrillo employees had to follow Ensign’s core values and use Ensign forms and templates in the course of doing their jobs; employees were given Ensign group email addresses; there was a flow of corporate officers between Ensign and its affiliates; Ensign implemented expectations that Cabrillo employees increase revenues and offered cash bonuses to Cabrillo if it maximized profits; and Ensign controlled the manner in which employees tracked their time.
General Contractor – Subcontractor
Likewise, this past year, a similar argument was made regarding the liability of a general contractor for claims of racial discrimination and harassment under Title VII by an employee of one of its subcontractors. In EEOC v. Skanska USA Building, Inc., the Sixth Circuit Court of Appeals found that the general contractor exerted sufficient control over the activities of the employees of one of its subcontractors to be considered a joint employer and therefore potentially liable for the racial discrimination inflicted upon employees of its subcontractor. The court held that two entities are joint employers if they “share or co-determine those matters governing essential terms and conditions of employment.” The factors considered included: the power to hire, discipline and fire employees; the ability to affect compensation and benefits; and the authority to direct the employees’ activities. Some of the factors that led to the conclusion that the general contractor may be a joint employer included that the general contractor instructed the subcontractor’s employees regarding how to perform their job, established their work hours, directed their daily assignments and responsibilities, collected their time sheets and carried workers compensation and liability insurance to cover the subcontractor’s employees. In addition, the general contractor’s termination requests regarding subcontractor employees were done with little or no inquiry and the general contractor recommended the hourly wage that the subcontractor should pay its employees.
Staffing Company - Client
Similarly, joint employer arguments have been made for a number of years in the context of staffing companies and their clients. In the California appellate case of Mathieu v. Norrell Corp., an employee sued a temporary employment agency for sexual harassment and retaliation, among other claims. The court held that both the temporary employment agency and the company at which the employee was placed were potentially liable. The court held “[i]n the context of an individual who is employed by a temporary agency and assigned to work on the premises of the agency’s client, we believe the purpose of FEHA to safeguard an employee’s right to hold employment without experiencing discrimination is best served by applying the traditional labor law doctrine of ‘dual employers,’ holding both the agency and the client are employers . . .”
In addition, by statute, as of January 1, 2015, with some limitations, California employers that hire temporary workers through temporary and staffing agencies now share liability with staffing agencies for certain violations of the state’s labor laws including, but not limited to, laws concerning wages, workers’ compensation coverage and worker safety.
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. As a result, understanding the legal arguments made for imposing joint employer liability as discussed above can lead to strategies to prevent or reduce such arguments being made against a company. The key is to limit the appearance that the company has any control over the dealings with the employees. For clarity purposes, the below top five best practices will be discussed in terms of primary and secondary with the primary being the franchisor, parent company, general contractor and client of staffing company, and the secondary being the franchisee, subsidiary company, subcontractor and staffing company.
1. 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.
2. 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. The secondary must set its own schedules and pay structure. Also, a primary should avoid setting minimum hours of work.
3. 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.
4. 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.
5. 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 keep franchisor-run training programs at the franchisee-owner level and make such training optional for anyone below that level if at all. 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.
