Strategies to Minimize Joint Employer Liability

Gerald DavisEmployers should re-evaluate the creation of indemnity with clients where workers are placed at client work sites and also analyze any existing indemnity provisions of contracts with others where either has agreed to provide indemnity.

The National Labor Relations Board (NLRB) reversed more than 30 years of precedent in the recent case of Browning-Ferris Industries of California, Inc., which effectively changed the rules regarding protection for previously protected employers.
Most employers found comfort that the NLRB would not likely consider them to be joint employers with other entities, such as franchisees, staffing agencies, and contractors/sub-contractors, unless they exercised “control” over those entities’ employees.  This case, however, reaches beyond the NLRB and, if upheld through the appellate system, constitutes precedent for the proposition that more than one employer may be considered an employer, and hence responsible for whatever the other does, such as an improper firing, racial discrimination, sexual harassment, and so forth.

In the Browning-Ferris case, it was argued that both Browning-Ferris and Lead Point were joint employers because both entities could exercise “immediate and direct control over the terms and conditions of workers’ employment,” with the NLRB coming down on the side of the new test.  In reaching its decision, the NLRB did not accept the contention that an entity should only be considered a joint employer if “industrial realities” made the entity “essential to meaningful bargaining.”  Therefore, two entities may be considered joint employers of a single work force if they are both employers within the meaning of the common law and if they share or co-determine those matters governing the essential terms and conditions of employment. In evaluating the allocation and exercise of control in the workplace, consideration is given to the various ways in which joint employers may “share” control over terms and conditions of employment or “co-determine” decisions.  The decision notes that a joint employer relationship will not be found based on a company’s “bare rights to dictate the results of a contracted service or to control or protect its own property.”  Instead, the NLRB stated they will evaluate the evidence to determine whether a user employer affects the means or manner of an employee’s work and terms of employment whether directly or through an intermediary.   In other words, the NLRB will no longer require that a joint employer not only possess the authority to control an employees’ terms and conditions of employment, but also exercises that authority.  Therefore, reserved authority to control the terms and conditions of employment, even if not exercised, is clearly relevant to the joint employment inquiry.  In this case, the client supervisor’s detailed directives concerning employee performance, set conditions of hiring that the client was contractually bound to follow and had the authority to discontinue the use of any given employee, control the speed at which the workers were to perform their service, and other productivity standards. The contract between the entities gave the employer the right to control other terms and conditions, such as the right to enforce its safety policies against the employees supplied by the other entity.

This decision leaves employers guessing as to how much indirect control they must have over another entity’s employees to be deemed a joint employer. It is unclear what one must do to “affect the means and manner” of the employee’s work and terms of employment and what it means to “share or co-determine those matters governing the essential terms and conditions of employment.” Therefore, to avoid joint employer status under the new test, an entity must take a more hands-off approach than ever before to the employees of the sourcing entity.

Some general rules can be established.  All contracts must be reviewed with staffing agencies and other contractors to ensure that both entities are not performing management function. The new test takes into consideration whether the potential to control employees exists so all contracts should include language making clear that all such control tests and control rests with one entity. While a bulletproof contract can be helpful evidence, what ultimately matters is whether the parties conducted themselves in accordance with the language of the contract.

When communicating expectations, allow the client to set the goal and to define the means of achieving that goal. Once management is delegated to another entity, a joint employer relationship will evolve. Alternatively, if one entity is to be the sole employer, all decisions regarding firing, hiring, and the way work is done has to be left to that entity. The contractual language must decide whether the employer indemnifies the client or the client indemnifies the employer and the resulting pricing and profit margin have to be calculated to accommodate this dedicated risk. If the client understands there is a transference of risk included in the cost of doing business, a meaningful arrangement can be created, with the division of risks and resulting exposure to the various wage and hour laws, employment laws, civil rights laws, and unemployment compensation laws being dedicated to a single entity rather than two entities. The result would be to make the employer an integral part of the client management team. The client could avoid the secondary exposure by having the employer make these decisions. This effort requires confidence, a substantial expenditure of time, and careful contract draftsmanship, but can result in long-term relationships where the employer is not simply another vendor to the client, but an integral part of the management and decision process.

Gerald C. Davis is a partner in our Livonia office where he concentrates his practice on corporate and business law, leveraged buy-outs, company reorganization and refinancing, analyzing investments for joint ventures, intellectual property, and drafting loan agreements. He may be reached at (734) 261-2400 or gdavis@cmda-law.com.