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THE LITTLER NATIONAL EMPLOYER LIBRARY

LITTLER ON CLASSIFYING WORKERS:

EMPLOYEES V. INDEPENDENT CONTRACTORS, JOINT EMPLOYEES & OTHER CONTINGENT WORKFORCE ISSUES AUTHOR S: Neil M. Alexander William Hays Weissman Christine L. Hogan Ryan G. Lockner Barry H. Uhrman


ABOUT THE AUTHORS Neil M. Alexander is a shareholder in the Phoenix office of Littler Mendelson, P.C., the largest U.S.based law firm exclusively devoted to representing management in labor and employment law. He also serves as Chair of the Staffing and Contingent Workers Practice Group. Neil's practice includes counseling clients on employment risk management for employee workforce or individual employee decisions, workforce design and maximizing contingent worker options while ensuring compliance, contingent workforce co-employment exposures, independent contractor misclassification assessments, compliance with the Americans with Disabilities Act (ADA) and the Family and Medical Leave Act (FMLA) among other legal issues. As a trial attorney, Neil regularly defends companies against claims involving: wrongful termination; unfair competition and trade secret violations; noncompetition agreements; whistleblower and retaliation; harassment and discrimination; Title VII; the Age Discrimination in Employment Act; the ADA; and the FMLA. Neil regularly appears in state and federal courts in Arizona and Nevada and before the Equal Employment Opportunity Commission (EEOC), the Department of Labor, the Arizona Civil Rights Division and the Nevada Equal Rights Commission. Neil also regularly contributes to articles and authors publications for national trade association newsletters. He is a frequent keynote speaker for national and state trade associations, client internal events and client appreciation events regarding employment law updates, contingent workforce issues, and employment law compliance related topics. William Hays Weissman is a shareholder in Littler’s Walnut Creek office who specializes in employment taxes and OFCCP/Affirmative Action audits. As an attorney with both an M.B.A. and Master of Laws (LL.M.) in Taxation, he understands the business and legal perspectives employers need to consider when addressing any employment problem. William counsels employers from a wide range of industries on employment tax issues including: employment tax audits; protests and appeals before state taxing agencies and the IRS as well as litigation in civil court; drafting employment and independent contractor agreements; and counseling on the tax implications of various employer-provided benefits. William also defends employers in disputes with current or former employees on a wide range of singleplaintiff employment related issues including worker classification, discrimination, harassment, retaliation, and wage and hour claims. William has experience representing and assisting government contractors with audits by the Office of Federal Contract Compliance Programs (OFCCP). He regularly advises clients on issues relating to OFCCP jurisdiction, alleged single employer status, and disparate impact and discrimination in hiring, promotion and compensation. Christine L. Hogan is an associate in Littler’s New York office. She represents and counsels employers in various aspects of traditional labor and employment law, including matters involving: race; age; sex; national origin; disability; pregnancy discrimination and harassment; whistleblowing and retaliation; and compliance with federal and state wage and hour laws. Christine’s practice focuses on single plaintiff and class action employment litigation and administrative proceedings before the EEOC and state and local human rights agencies. Ryan G. Lockner is an Associate in Littler’s Phoenix office. He represents and counsels clients in employment litigation, arbitration, and mediation, including claims based on: Title VII; the ADA; the ADEA; the FMLA; the Arizona Civil Rights Act; discrimination and harassment; retaliation; wrongful discharge; wage and hour class and collective actions; unfair competition, trade secrets, and restrictive covenants.

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Ryan is a veteran of the U.S. Army where he served as an Intelligence Officer. During his tenure in the Army, Ryan deployed overseas multiple times, and gained valuable experience researching and analyzing complex information, as well as advising combat troops, senior military officials, and civilian policymakers. Barry H. Uhrman is an Associate in Littler’s Phoenix office. He has defended cases for municipal and governmental employers, Fortune 500 clients, and other public and private sector employers in federal and state courts and before administrative agencies, regarding state and federal employment discrimination claims. He also represents public and private sector employers in various labor law matters and during negotiations. Barry also represents governmental entities (Title II) in cases involving alleged discrimination in services, programs, and activities provided by state and local government entities and private businesses (Title III) in ADA access litigation involving businesses that own, operate, or lease places of public accommodation. Barry, who was named as one of Arizona’s Finest Lawyers, is a frequent speaker for client internal events, governmental entity employers, and national and international law associations regarding social media, drug testing and medical marijuana.

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COVERAGE Scope of Discussion. A company’s legal obligation to its workers under the various employment and labor laws depends primarily on whether the workers are considered employees under the applicable statute. The discussion below sets forth the different tests used to determine employee status and is contrasted against proper or improper independent contractor status. The discussion also captures the added complexity when a company employs a contingent workforce. The term contingent labor refers to workforce relationships outside the traditional, full-time employee model and often includes third-party staffing where staffing firms recruit, hire and employ the workers; outsourcing companies that totally manage a specific business function for their clients, often on the business premises of their clients; professional employer organizations (PEOs) which provide administrative support to workers recruited and supervised by their client-companies; and leasing firms that provide a hybrid of administrative services to a company. Practical guidance is also included in the form of an independent contractor questionnaire, a sample independent contractor agreement and additional guidelines on structuring a third-party, contingent workforce relationship. Disclaimer. This publication is not a do-it-yourself guide to resolving employment disputes or handling employment litigation. Nonetheless, employers may find the information useful in understanding the issues raised and their legal context. This publication is not a substitute for experienced legal counsel and does not provide legal advice regarding any particular situation or employer or attempt to address the numerous factual issues that inevitably arise in any employment-related dispute. Although the major recent developments in federal employment and labor law are generally covered, this publication is not all-inclusive and the current status of any decision or principle of law should be verified by counsel. The focus of this publication is federal law. Although some state law distinctions may be included, the coverage is not comprehensive. To adhere to publication deadlines, developments and decisions subsequent to October 1, 2016 are generally not covered.

©2016 LITTLER MENDELSON, P.C. ALL RIGHTS RESERVED. All material contained within this publication is protected by copyright law and may not be reproduced without the express written consent of Littler Mendelson.

© 2016 LITTLER MENDELSON, P.C. ALL RIGHTS RESERVED.

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TABLE OF CONTENTS § 1 OVERVIEW REGARDING CLASSIFICATION OF WORKERS § 1.1 EMPLOYEES V. INDEPENDENT CONTRACTORS § 1.1(a) Advantages in Engaging Independent Contractors § 1.1(b) Risks in Engaging Independent Contractors § 1.2 CONTINGENT LABOR & USE OF THIRD-PARTY FIRMS § 1.2(a) Definition of Contingent Labor § 1.2(b) Definitions of Third-Party Firms § 1.2(c) Advantages of Using Third-Party Firms § 1.2(d) Risks in Using Third-Party Firms § 1.2(e) Overview of Joint Employer Status § 1.3 TESTS USED TO DETERMINE A WORKER’S STATUS § 1.3(a) Common Law Rules & Common Law Control Test § 1.3(a)(i) IRS 20 Factors “Test” § 1.3(a)(ii) IRS Guidelines § 1.3(b) Economic Realities Test § 1.3(b)(i) DOL Interpretation of Economic Realities Test § 1.3(c) Hybrid Test § 1.3(d) ABC Test § 1.3(e) Applying the Tests § 1.3(f) Requests to the IRS to Determine Worker Status § 2 DETERMINING WORKER STATUS FOR FEDERAL TAX PURPOSES § 2.1 “STATUTORY EMPLOYEE” STATUS FOR FEDERAL TAX PURPOSES § 2.1(a) Workers Subject to FICA Taxes § 2.1(b) Workers Subject to FUTA Taxes § 2.1(c) Workers Subject to Federal Income Tax Withholding § 2.2. “STATUTORY INDEPENDENT CONTRACTOR” STATUS FOR FEDERAL TAX PURPOSES § 2.2(a) Four Types of Statutory Independent Contractors § 2.2(a)(i) Real Estate Agents § 2.2(a)(ii) Direct Sellers § 2.2(a)(iii) Newspaper Distributors & Carriers § 2.2(a)(iv) Sitter-Referral Agencies § 2.2(b) Section 530 of the Revenue Act of 1978: Safe Harbor Provision § 2.2(b)(i) Overview of Requirements of Section 530 Protection § 2.2(b)(ii) Consistent Treatment Requirement Under Section 530 § 2.2(b)(iii) Federal Tax Form Reporting Requirement Under Section 530 § 2.2(b)(iv) Reasonable Basis Requirement Under Section 530 § 2.2(c) Engaging Former Employees as Independent Contractors § 2.2(d) Dual-Status Workers § 2.3 CORRECTING MISCLASSIFICATION OF INDEPENDENT CONTRACTORS FOR FEDERAL TAX PURPOSES § 2.3(a) IRS Classification Settlement Program § 2.3(b) IRS Voluntary Classification Settlement Program § 3 WORKER STATUS UNDER SPECIFIC EMPLOYMENT & LABOR LAWS § 3.1 WAGE & HOUR CONSIDERATIONS § 3.1(a) Test for Employee/Independent Contractor Status Under the FLSA § 3.1(b) Payment of Part-Time Employees § 3.2 EMPLOYEE BENEFITS CONSIDERATIONS § 3.2(a) Eligibility for Employee Benefit Plans § 3.2(a)(i) Ineligible Workers § 3.2(a)(ii) Excluded Employees § 3.2(a)(iii) Consequences of Allowing Independent Contractors to Participate in a Plan or Over-Exclusion § 3.2(a)(iv) Health Benefit Plans & Multiple Employer Welfare Arrangements

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§ 3.2(b) Test for Employee/Independent Contractor Status Under ERISA § 3.2(c) Issues of Misclassification & Third-Party Firms Under ERISA Section 510 § 3.2(d) “Leased Employees” Under Internal Revenue Code Section 414(n) § 3.2(e) Employment Status & COBRA Rights § 3.2(f) Patient Protection and Affordable Care Act “Safe Harbor” § 3.3 WORKPLACE SAFETY CONSIDERATIONS § 3.3(a) Employee/ Independent Contractor Status Under Fed-OSH Act § 3.3(b) Fed-OSH Act Protections & the Use of Third-Party Firms § 3.3(c) Fed-OSHA’s Temporary Worker Initiative § 3.4 EMPLOYMENT DISCRIMINATION, HARASSMENT & RETALIATION CONSIDERATIONS § 3.4(a) Coverage Thresholds & Test for Employee/Independent Contractor Status § 3.4(b) Antidiscrimination Protections & the Use of Third-Party Firms § 3.4(b)(i) Antidiscrimination Liabilities Beyond the Traditional Employee Relationship § 3.4(b)(ii) Indemnification Provisions & the Use of Third-Party Firms § 3.5 WORKERS’ COMPENSATION & UNEMPLOYMENT CONSIDERATIONS § 3.5(a) Workers’ Compensation & the Use of Third-Party Firms § 3.5(b) Unemployment Insurance Laws & the Use of Third-Party Firms § 3.6 LAYOFF & PLANT CLOSURE CONSIDERATIONS § 3.6(a) Independent Contractors Under the WARN Act § 3.6(b) Temporary Employees Under the WARN Act § 3.6(c) Part-Time Employees Under the WARN Act § 3.6(d) Leased Employees & the Use of Third-Party Firms Under the WARN Act § 3.7 LABOR RELATIONS & UNION CONSIDERATIONS § 3.7(a) Test for Employee/Independent Contractor Status Under the NLRA § 3.7(b) Joint Employer Status Under the NLRA § 3.7(c) Multi-Employer Bargaining Units § 3.7(d) Temporary & Part-Time Employees Under the NLRA § 3.8 FEDERAL CONTRACTORS & THE USE OF THIRD-PARTY FIRMS § 3.8(a) Recordkeeping & Applicant Dispositioning § 3.8(b) Job Listings § 3.8(c) External Outreach § 3.8(d) Testing § 3.9 SPECIALIZED EMPLOYMENT AGREEMENTS, TEMPORARY EMPLOYEES & TERM LIMITS § 3.9(a) Specialized Employment Agreements § 3.9(b) Temporary Employees & Term Limits § 3.9(b)(i) Term Limits & FMLA Leave § 3.9(b)(ii) Nonbenefit Problems Caused by Term Limits § 4 PRACTICAL GUIDELINES FOR EMPLOYERS § 4.1 INDEPENDENT CONTRACTOR AUDIT QUESTIONNAIRE § 4.2 SAMPLE INDEPENDENT CONTRACTOR AGREEMENT § 4.3 GUIDELINES FOR STRUCTURING A THIRD-PARTY, CONTINGENT WORKFORCE RELATIONSHIP § 4.3(a) Relationship Between a Third-Party Firm & the Client Company § 4.3(b) Relationship Between a Third-Party Firm & Workers § 4.4 SAMPLE WORKER ACKNOWLEDGEMENT & NONDISCLOSURE AGREEMENT

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§ 1 OVERVIEW REGARDING CLASSIFICATION OF WORKERS § 1.1 EMPLOYEES V. INDEPENDENT CONTRACTORS Determining the status of workers is a critical consideration for any business. From a strictly legal perspective, a company’s obligations to a worker depend principally on whether the worker is an employee or an independent contractor with respect to the company.

§ 1.1(a) Advantages in Engaging Independent Contractors From a company’s perspective, the ability to engage independent contractors allows the company to react nimbly to marketplace demands by quickly expanding its service capabilities in specific areas where demand is hot and precipitously contracting its service capabilities in reaction to cooling demand. Likewise, when a particular problem demands a rapid solution or a one-off engagement, the availability of independent contractors allows a company to engage highly trained and specialized professionals to remedy the problem quickly. From an independent contractor’s perspective, the status provides an opportunity for one to focus his or her entire efforts on the individual’s area of expertise and to maintain control over when, where and for whom he or she will perform services. It also affords the individual an opportunity to grow professionally at a rapid pace by obtaining broad exposure to different clients with unique needs.

§ 1.1(b) Risks in Engaging Independent Contractors The independent contractor option can be as risky as it is rewarding. The following outlines some of the risks of misclassifying an employee as an independent contractor: Enforcement efforts continue to increase: Companies are under increased scrutiny from federal and state governments regarding alleged misclassification of workers as independent contractors. The U.S. Department of Labor (DOL) estimates that as many as 30% of companies misclassify a percentage of their workforce and has reiterated its intention to “detect and deter” independent contractor misclassification—an enforcement priority that will likely persist for the foreseeable future.1 To reach its goal of “strengthening and coordinating (f)ederal and (s)tate efforts to enforce labor violations arising from misclassification,”2 the DOL has entered into formal agreements to work together and share information with more than half of the states in addition to the Internal Revenue Service (IRS).3 The IRS also has “information sharing programs” with many state and local agencies to “uncover employment tax avoidance schemes and ensure proper worker classification.”4 1

U.S. Dep’t of Labor, Strategic Plan FY 2014–2018, at 53-54, 62 (Mar. 10, 2014), available at https://www.dol.gov/agencies/osec/stratplan. 2 Strategic Plan FY 2014-2018, at 53. 3 As of October 1, 2016, the agreements are as follows: Alabama, Alaska, Arkansas, Colorado, Connecticut, Florida, Hawaii, Idaho, Illinois, Kentucky, Louisiana, Maryland, Massachusetts, Minnesota, Missouri, Montana, New Hampshire, New Mexico, New York, North Carolina, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Texas, Utah, Vermont, Virginia, Washington, Wisconsin and Wyoming. States with expired agreements that have not been renewed as of October 1, 2016: California (expired December 21, 2014) and Iowa (expired January 17, 2016). For the most recent information, see U.S. Dep’t of Labor, W&H Div., Employee Misclassification as Independent Contractors, The DOL Misclassification Initiative, available at http://www.dol.gov/whd/workers/misclassification/#stateDetails. 4 I.R.S., News Release No. IR-2007-184, IRS and States to Share Employment Tax Examination Results (2007); see © 2016 LITTLER MENDELSON, P.C. ALL RIGHTS RESERVED.

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Litigation from the misclassified worker: Another source of attack comes from the independent contractors themselves when they contest their status in order to gain access to employee benefit programs maintained by the companies for which they perform services. These attacks, generally through class action litigation, often seek a variety of benefits or protections denied based on their employment status, including overtime, minimum wage, access to antidiscrimination laws, penalties and business expense reimbursements.5 Liability for unpaid taxes: Critics of independent contractor status historically have asserted that the federal government loses tax revenues as a consequence of workers being classified as independent contractors rather than employees.6 If a worker is treated as an independent contractor, the company likely will not have withheld or remitted any taxes to the IRS. Because the Internal Revenue Code requires an employer to “withhold at the source”—which means that an employer is obligated to withhold taxes from an employee’s wages and remit them to the taxing authority—an employer becomes liable for all taxes, including the employee’s portion, if it misclassifies workers, including: 

its taxes under the Federal Insurance Contributions Act (FICA), comprised of both Medicare and Social Security taxes;

the employee’s Medicare and Social Security taxes;

the employee’s personal income taxes that should have been withheld;

the Federal Unemployment Insurance Tax Act (FUTA) taxes;

any penalties and interest; and

any state or local income taxes, unemployment taxes or other state or local employment taxes, such as disability insurance taxes.

also A Look at Information Sharing Agreements Between the IRS and States, FORBES, Aug. 7, 2015, available at http://www.forbes.com/sites/taxanalysts/2015/08/07/a-look-at-information-sharing-agreements-between-the-irs-andstates/#54789b491a11 (as of July 2015 the IRS had 88 information sharing agreements with various state departments of revenue, labor and transportation). 5 See, e.g., Bowerman v. Field Asset Servs., 2015 U.S. Dist. LEXIS 37988 (N.D. Cal. Mar. 24, 2015) (certifying class of third-party “vendors” (owners of businesses) defendant hired to provide cleaning services in suit alleging defendant systematically undercompensated them by classifying them as independent contractors); Shepard v. Lowe’s HIW, Inc., 2013 U.S. Dist. LEXIS 118419 (N.D. Cal. Aug. 19, 2013) (certifying a class of workers in suit alleging defendant deprived product installers of benefits by improperly classifying them as independent contractors instead of employees). 6 U.S. Dep’t of Labor, Strategic Plan FY 2014-2018, at 53 (“Worker misclassification also generates substantial losses to the Treasury and the Social Security, Medicare and Unemployment Insurance Trust Funds.”); Treasury Inspector General for Tax Administration, Employment Tax Compliance Could Be Improved With Better Coordination and Information Sharing, Mar 23, 2010, at 1 (“The misclassification of employees as independent contractors is a nationwide issue affecting millions of employees that continues to grow and contribute to the tax gap.”). Note, however, that the loss of revenue is “not necessarily the result of misclassification of a worker’s status,” but from lower compliance rates of independent contractors as opposed to employees and their employers in reporting taxable income. Joint Committee on Taxation, Present Law and Background Relating to Worker Classification for Federal Tax Purposes (JCX-26-07), at 10 (May 7, 2007), available at www.house.gov/jct.

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If assessed, the engaging company or agency generally cannot recover these amounts from the independent contractor.7 However, if the engaging entity can prove that the worker paid the taxes, the amount of back taxes owed may be reduced.8 In addition, the Internal Revenue Code offers a safe harbor that may apply to reduce an employer’s liability for unintentional violations of income tax withholding and FICA tax contribution requirements, otherwise the employer is responsible for the full taxes.9 Liability for unpaid wages: Companies face potential liability under the Fair Labor Standards Act (FLSA) for misclassifying workers. For example, if a worker was not treated as an employee but should have been, and is subsequently reclassified as a nonexempt employee, the employer can be liable for failure to pay wages (minimum wage for every hour worked plus unpaid overtime). Further, employees may recover liquidated damages and attorneys’ fees under the FLSA. Employers may also be liable to state agencies and to misclassified employees for significant penalties, including failure to timely pay wages. Liability for Patient Protection and Affordable Care Act (ACA) penalties: If workers are deemed the “common law” employees of a company, the workers must be counted in the ACA compliance testing which requires that group medical benefits be offered to 95% of the company’s common law employees. The penalties can be draconian for failure—$2,000 annually for every single employee and misclassified worker of the company, regardless of whether the workers were offered or accepted coverage. There are “safe harbor” billing practices and other steps that can be taken to mitigate these significant exposures. (For further discussion, see §3.2(f) below.) Varying standards used to determine employee/independent contractor status: To further complicate matters, there is not just one standard for determining whether an individual qualifies as an independent contractor. The question of independent-contractor-versus-employee classification arises in a variety of contexts under federal and state law and different standards apply in the various contexts. Despite numerous court decisions and administrative guidance, determining whether a worker is an employee or independent contractor can be difficult, often with contrary results reached on seemingly similar facts. For example, for federal tax purposes, golf professionals have been ruled to be employees in some cases10 and independent contractors 11 in others. Contrary results on the status of nearly identical workers are not uncommon.

§ 1.2 CONTINGENT LABOR & USE OF THIRD-PARTY FIRMS § 1.2(a) Definition of Contingent Labor Contingent labor is a broad term that refers to all workforce relationships with the exception of full-time employees of a company. The term includes: 

W-2 employees of a staffing firm, outsourcing company or other vendor;

independent contractors and consultants;

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26 U.S.C. § 3509(d). 26 U.S.C. § 3402(d). 9 26 U.S.C. § 3509. 10 Rev. Rul. 68-626, 1968-2 C.B. 466. 11 Rev. Rul. 68-625, 1968-2 C.B. 465. 8

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direct part-time employees; and

direct employees leased back by leasing companies, professional employer organizations, and similar secondment agreements between two related or unrelated companies.

§ 1.2(b) Definitions of Third-Party Firms Employee leasing firms and professional employer organizations (PEOs) are firms that contract with companies to become the “employer of record” and offer related employment benefits to the workers of their client-companies. The relationship is memorialized in a formal contract and the entities become contractual co-employers with very specific contractual rights and responsibilities owed to the workers and between the two entities. According to the National Association of Professional Employer Organizations (NAPEO),: a “leasing or staffing firm” supplies (recruits, screens and hires) new workers to a client company, while a “PEO” supplies administrative services to a client company and its existing workforce (as opposed to supplying labor for the client).12 Accordingly, PEO’s will serve as the “employer of record” and administer payroll and tax obligations but they do not recruit, screen, hire, supervise or terminate the workers. However, the workers receive a direct W-2 from the PEO and are generally able to participate in the benefits plans of the PEO. Temporary staffing firms and referral agencies are other types of third-party firms. The DOL notes that temporary staffing firms place temporary workers (also referred to as “agency temporaries”) at a “client’s worksite, and typically, though not always, the assignment is for a short period of time (less than a year).”13 To add to the complexity, temporary staffing agencies may also often lease workers to the client. The NAPEO adds that a temporary staffing firm recruits, screens, hires and assigns its employees to clients to support or supplement the client’s workforce.14 A referral agency refers workers to client companies and treats the workers as independent contractors with respect to the referral agency. The growth of the “sharing economy” over the last decade—loosely defined as an economic model in which technology platforms allow individuals to borrow, rent or use assets owned by someone else15—is changing the landscape regarding referral agencies and adding significant complexity to the classification of workers. For purposes of simplicity, the following terms are used throughout the remainder of this publication: 

“Firm” refers to various third-party firms that assign, payroll or refer workers; and

“Client Company” refers to the company for which the worker performs services.

While these terms may over-simplify the abundant variety of potential work relationships and important nuances, they help to facilitate a general understanding and application of the general concepts involved in classifying workers. 12

See National Association of Professional Employer Organizations (NAPEO), What is a PEO? Frequently Asked Questions, available at http://napeo.org/what-is-a-peo/selecting-a-peo/faqs. 13 Susan N. Houseman, DOL, Flexible Staffing Arrangements: A Report on Temporary Help, On-Call, Direct-Hire Temporary, Leased, Contract Company, and Independent Contractor Employment in the United States (Aug. 1999). 14 See National Association of Professional Employer Organizations (NAPEO), What is a PEO? Frequently Asked Questions, available at http://napeo.org/what-is-a-peo/selecting-a-peo/faqs. 15 See The Rise of the Sharing Economy, ECONOMIST, Mar. 9, 2013, available at www.economist.com/news/leaders/21573104-internet-everything-hire-rise-sharing-economy.

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There are four possible arrangements when a Firm is interposed between a worker and a Client Company: 1. the worker is an employee of both the Firm and the Client Company; 2. the worker is an employee of the Firm and a nonemployee (may sometimes be an independent contractor) of the Client Company; 3. the worker is a nonemployee (or independent contractor) of the Firm and an employee of the Client Company; or 4. the worker is a nonemployee (or independent contractor) of both the Firm and the Client Company. While the foregoing represents all the possible arrangements for contingent workers, when a third-party firm is involved, a worker’s status may be characterized differently for purposes of different laws. For example, a worker may qualify as a non-employee or independent contractor of both the Firm and the Client Company for federal employment tax purposes, but qualify as a non-employee or independent contractor of the Firm and an employee of the Client Company for employee benefit purposes. In determining the proper status under a specific law, a worker’s status relative to the Firm and relative to the Client Company generally must be determined separately.

§ 1.2(c) Advantages of Using Third-Party Firms An employee leasing/PEO relationship involves a contractual allocation and sharing of employer responsibilities between the Firm and its Client Company. The Firm generally assumes responsibility and liability for human-resources issues and payroll-tax compliance, while the Client Company retains management and control of the day-to-day operation of its business. While both an employee leasing firm and PEO technically assign workers to a Client Company, a PEO offers a Client Company an opportunity to effectively “outsource” its entire human resources function. A PEO can take over as employer (and assign back to the Client Company) a Client Company’s entire workforce. An employee leasing firm, by contrast, commonly assigns to a Client Company workers that represent a smaller portion of the Client Company’s entire workforce. From a legal analysis standpoint, however, both are variations on the same concept. Employee leasing firms may also be asked to locate and source worker talent, a function not normally provided by PEOs. While most large corporations have the financial resources and expertise to maintain familiarity and compliance with the vast and growing array of federal, state and local employment laws , few small-and medium-sized businesses can afford to do so. PEOs offer such businesses a solution by providing them with the services and expertise of a large, experienced personnel department, which, in turn, enables those businesses to concentrate on their core business and thereby increase their profitability. PEOs also can save companies money due to economies of scale. A PEO that employs thousands of workers can obtain more affordable health insurance rates and workers’ compensation premiums than a small employer with, for instance, 50 employees. Moreover, PEOs most often handle the benefits and human resource functions for several companies, and can administer these functions more economically than individual companies could. The benefits of utilizing a PEO often inure not only to the Client Company but also to the company’s workforce because, in many cases, workers will receive a greater quality and quantity of benefits from a PEO than they would receive from a small employer. Staffing firms become specialists in advertising, recruiting, attracting, screening, hiring and on boarding new employees. The staffing firms generally act as the W-2 employer for payroll and benefits purposes. © 2016 LITTLER MENDELSON, P.C. ALL RIGHTS RESERVED.

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The real value added proposition of staffing firms is the ability to locate and supply “ready-to-go” workers, often in large numbers, and serve as a pipeline for new, direct employees of Client Companies, and/or to help manage large seasonal or contract-specific fluctuations in the Client Companies’ workforces. Temporary workers are often seasonal, contract-specific, or “temporary-to-permanent” periods for workers to demonstrate skills and cultural fit within the Client Company.

§ 1.2(d) Risks in Using Third-Party Firms Regardless of the careful (or careless) drafting of agreements between the Firms and Client Companies, federal and state agencies and the courts will apply applicable statutory tests that are not governed by the contract between the parties. Joint employment status may create legal liability for Client Companies that enter into contingent worker arrangements precisely to reduce risk. An administrative or judicial determination that a Firm and its clients are joint employers can destroy most of the anticipated benefits of the contingent worker arrangement. It can also subject clients to substantial liability for the Firms’ acts or omissions, over which the client has little or no control. On the other hand, the Firm can also incur unintended liability for problems such as harassment by others in the workplace or plant safety problems over which it has little control.

§ 1.2(e) Overview of Joint Employer Status Under certain employment laws, a company may be deemed a “joint employer” with another company if it has “direct and immediate control” over the other company’s employees (e.g., direct supervision of the employees or control over their working conditions). Joint employer status results in the Firm and Client both potentially being individually and jointly liable.16 The National Labor Relations Board (NLRB or “Board”) has departed from the general view that control must be direct and immediate for the creation of a joint employment relationship under the National Labor Relations Act (NLRA). In Browning-Ferris Industries of California, Inc., the Board determined that if an entity affects the means and manner—either directly or indirectly—of the work terms and conditions of another entity’s employees, it will be considered a joint employer.17 Generally, the test for identifying potential joint employer liability is similar to the test used in differentiating between employees and non-employees or independent contractors under the statute at issue.18 Some examples of cases determining whether a joint employer relationship existed include: • A client company of a staffing firm was found to be the employer of a temporary staffing employee. Although the staffing firm handled all administrative functions (e.g., maintaining personnel and payroll records, paying staff and making withholdings, making unemployment contributions), the hiring and firing decisions were made only upon approval or at the request of the client company at which the plaintiff was placed and the plaintiff’s job performance had been 19 evaluated only by the client company.

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See, e.g., Barfield v. N.Y. City Health & Hosps. Corp., 537 F.3d 132, 138 (2d Cir. 2008) (finding joint employer status when the plaintiff performed work on the hospital’s premises, using the hospital’s equipment and the work was integral to the hospital’s operation). 17 Browning Ferris Indus. of Cal., Inc.,, 362 N.L.R.B. No. 186 (2015). 18 See, e.g., In re Enterprise Rent-A-Car Wage & Hour Empl. Practices Litig., 683 F.3d 462 (3d Cir. 2012) (joint employer under FLSA); Barfield v. N.Y. City Health & Hosps. Corp., 537 F.3d 132 (2d Cir. 2008); Catani v. Chiodi, 2001 U.S. Dist. LEXIS 17023 (D. Minn. Aug. 13, 2001). 19 Johnson v. Manpower Prof’l Servs., Inc., 442 F. App’x 977 (5th Cir. 2011).

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• The parent company of 38 rental car facilities was determined not to be a joint employer of the subsidiaries’ assistant managers, where the parent company: (1) had no authority to hire or fire assistant managers, promulgate work rules or assignments, or set compensation, benefits, schedules, or rates or methods of payment; (2) was not involved in supervision or discipline; and (3) did not exercise or maintain any control over employee records.20 A “joint employment” determination between financially related companies, such as parent and subsidiary or sister companies is called the “integrated enterprise” test. • A nightclub owner who was a member of the limited liability company that purchased the nightclub was determined not to be a joint employer because he did not exert any operational control over the nightclub’s employees.21 • A shipping company was determined not to be a joint employer of a contractor’s drivers, where the totality of the economic circumstances indicated that the drivers were not economically dependent upon the shipping company.22 Client Companies and Firms can reduce the risk of unexpected joint employer liability in three ways: 1. drafting clear contracts with delegated rights and duties, including obligations in relation to the workers and omitting any references to direct or indirect control over workers for which the Company does not want to be deemed an “employer” or “joint employer”; 2. include appropriate indemnification provisions that allocate liability in accordance with the parties’ expectations; and 3. only contract with financially solvent clients and vendors. Many of the legal risks such as unpaid overtime, minimum wage, taxes or ACA penalties are not insurable and a financially bankrupt client or vendor leads to big financial exposures.

§ 1.3 TESTS USED TO DETERMINE A WORKER’S STATUS There are four principal tests used to determine whether a worker is an employee or an independent contractor: 1. common law rules or common law control test; 2. economic realities test (with several variations); 3. hybrid test, combining the common law and economic realities test; and 4. ABC test (or variations of this test). The first, and always critical, step when engaging any worker is to determine whether a worker is an employee or independent contractor. That requires an understanding of which test to apply—which depends upon both the jurisdiction and law at issue. However, because the employment statutes provide 20

In re Enterprise Rent-A-Car Wage & Hour Empl. Practices Litig., 683 F.3d 462. Gray v. Powers, 673 F.3d 352 (5th Cir. 2012) (declining to adopt a rule that would impose individual liability on all shareholders, members and officers of entities that are employers under the FLSA based on their position rather than the economic reality of their involvement in the business). 22 Layton v. DHL Express, 686 F.3d 1172 (11th Cir. 2012). 21

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circular definitions, the tests often blend into each other. Thus, while there may be four distinct tests identified by courts, in practice, the factors present in each test overlap to such a degree that the tests often appear to merge.

§ 1.3(a) Common Law Rules & Common Law Control Test The issue of whether a worker is an employee or independent contractor is complicated and nuanced; more so than the recent government rhetoric and litigation suggests. In the 1930s, when much of the social legislation aimed at protecting employees was first enacted, the distinction between employees and independent contractors was largely assumed to be understood and thus was not seriously addressed. For example, the Social Security Act (SSA) did not define an “employee” when it was enacted in 1935, and no statutory definition existed until 1948. After a series of court decisions used conflicting tests to determine a worker’s status for employment tax purposes, culminating in U.S. Supreme Court review,23 Congress added a definition of employee to the Internal Revenue Code: the term “employee” ... does not include (1) any individual who, under the usual common-law rules applicable in determining the employeremployee relationship, has the status of an independent contractor or (2) any individual (except an officer of a corporation) who is not an employee under such common-law rules.24 The “usual common law rules” state that if an employer has the right to control the means by which the worker performs his or her services as well as the ends, the worker is an employee.25 The existence of the employer’s right to control is critical; the exercise of that control is not. Thus, the Treasury Regulations state that “it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so.”26 In contrast, “if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is an independent contractor.”27 Each case must be determined by its own facts and circumstances.

§ 1.3(a)(i) IRS 20 Factors “Test” In 1987, IRS Revenue Ruling 87-41 identified 20 factors to help determine whether the engaging entity retains the requisite right to control the means and methods of worker performance to qualify such worker as an employee.28 While often called the “20 Factors Test,” it is not a test—merely a method to determine whether, under the usual common law rules, a worker is an employee or an independent contractor.

23

See United States v. Silk, 331 U.S. 704 (1947); Bartels v. Birmingham, 332 U.S. 126 (1947). Pub. L. No. 642, 80th Cong., 2nd Sess. (1948) (emphasis added); see also United States v. Webb, Inc., 397 U.S. 179, 183–84 (1970) (tracing history of enactment of definition of “employee” for federal unemployment insurance tax purposes); Illinois Tri-Seal Prods., Inc. v. United States, 353 F.2d 216, 225-26 (Ct. Cl. 1965). 25 Treas. Reg. § 31.3121(d)-(1)(c). 26 Treas. Reg. § 31.3121(d)-(1)(c)(2). 27 Treas. Reg. § 31.3121(d)-(1)(c)(2). 28 Rev. Rul. 87-41, 1987-1 C.B. 296. 24

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The 20 common law factors weigh in favor of independent contractor status under the following circumstances:29 1. No instructions: An independent contractor does not receive instructions from the engaging entity as to how to accomplish a job. 2. No training: An independent contractor does not receive training from the engaging entity. 3. No integration: The engaging entity’s operations or ability to be successful does not depend on the service of independent contractors. By contrast, the factor weighs in favor of employee status if the workers constitute a critical and essential part of the taxpayer’s business. 4. Services do not have to be rendered personally: Because independent contractors are in business for themselves and are contracted with to provide a certain result, they have the right to hire others to assist them. 5. Control their own assistants: Independent contractors retain the right to control the work activities of their assistants. 6. Not a continuing relationship: Unlike employees, independent contractors generally do not have a continuing working relationship with the engaging company, although the relationship may be frequent, by means of multiple engagements.

29

The Internal Revenue Service Manual, 4600 Employment Tax Procedures, Exh. 4640-1, provides that workers are generally employees if they: (1) must comply with employer’s instructions about the work; (2) receive training from or at the direction of the employer; (3) provide services that are integrated into the business; (4) provide services that must be rendered personally; (5) hire, supervise, and pay assistants for the employer; (6) have a continuing working relationship with the employer; (7) must follow set hours of work; (8) work full-time for an employer; (9) do their work on the employer’s premises; (10) must do their work in a sequence set by the employer; (11) must submit regular reports to the employer; (12) receive payments of regular amounts at set intervals; (13) receive payments for business and/or traveling expenses; (14) rely on the employer to furnish tools and materials; (15) lack a major investment in facilities used to perform the service; (16) cannot make a profit or suffer a loss from their services; (17) work for one employer at a time; (18) do not offer their services to the general public; (19) can be fired at any time by the employer; and (20) may quit work at any time without incurring liability.

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7. Work hours are set by the independent contractor: An independent contractor has control over the hours worked for accomplishing the result.30 8. Time to pursue other work: An independent contractor is free to work when and for whom the individual chooses. A requirement to work full-time indicates control by the engaging entity. 9. Job location: Unless the services cannot be performed elsewhere, an independent contractor has the right to choose where the work will be done. 10. No requirements on the order or sequence of work: Independent contractors have control over how a result is accomplished and, therefore, to determine the order and sequence in which their work will be performed. 11. No required reports: Independent contractors are accountable for accomplishing the objective only; interim or progress reports are not required. 12. Payment for the result: Independent contractors are paid by the job and are not compensated based on the time spent performing the work. 13. Business expenses: Independent contractors are responsible for their incidental expenses. 14. Own tools: As business owners, independent contractors provide their own equipment and tools to do the job. 15. Significant investment: An independent contractor’s investment in his or her trade is bona fide, essential and adequate. 16. Possible profit or loss: Independent contractors bear the risk of realizing a profit or incurring a loss. 17. Working for multiple entities: Independent contractors are free to work for more than one entity at a time. 18. Services available to the general public: Independent contractors make their services available to the general public. 19. Limited right to discharge: An independent contractor is not terminable at will but may be terminated only for failure to comply with the terms of the contract. 20. Liability for noncompletion: Independent contractors are responsible for the satisfactory completion of a job and are liable for failing to complete the job in accordance with the contract. To determine whether a worker qualifies as an independent contractor, the relationship between the worker and a business is analyzed with the aid of the 20 common law factors. No one factor is decisive; however, the degree of importance of each depends on the occupation and factual context in which

30

However, the Seventh Circuit Court of Appeals has repeatedly held that “[m]erely setting a work schedule is not sufficient to support a finding that a given person is an employee rather than an independent contractor.” Suskovich v. Anthem Health Plans of Va., Inc., 553 F.3d 559, 566 (7th Cir. 2009) (citing Ost v. Western Suburban Travelers Limousine Co., 88 F.3d 435, 438 (7th Cir. 1996)).

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services are being performed.31

§ 1.3(a)(ii) IRS Guidelines The IRS has since deemphasized the 20 factors test, first in its 1996 Training Materials and subsequently in the Internal Revenue Manual: Technical Guidelines for Employment Tax Issues (“IRS Manual”).32 It has distilled the common law rules into three categories, each focusing on a different aspect of a service relationship: 1. behavioral control; 2. financial control; and 3. the relationship of the parties.33 Under the behavioral control category, the IRS Manual/Training Guidelines identify factors for evaluating an entity’s right to direct or control the manner in which a worker performs services, including whether the worker is provided with instructions and training concerning the means or methods of performance, the degree of instruction, and whether there is an evaluation system measuring the details of how the work is performed. Under the financial control category, the IRS Manual/Training Guidelines identify factors for evaluating an entity’s right to control the financial aspects of a worker’s activities. The factors include: • whether the worker has made a significant investment in his or her business (e.g., in equipment), although recognizing that certain types of work do not require a significant investment); • whether the worker is responsible for expenses incurred in the performance of services; • whether the worker makes his or her services available to the relevant market; • the method of payment of the worker’s fees; and • whether the worker has the opportunity for a profit or loss. Under the relationship of the parties category, the IRS Manual/Training Guidelines identify factors for evaluating how the parties perceive their relationship. Those factors include: 31

See, e.g., Rev. Rul. 87-41, 1987-1 C.B. 296; C.L.E.A.N., L.L.C. v. Division of Emp’t Sec., 405 S.W.3d 613 (W.D. Miss. 2013) (applying common law rules and right to control test to ascertain workers’ status as employees or independent contractors); College Network v. Mississippi Dep’t of Emp’t Sec., 114 So. 3d 740 (Miss. 2013); Olivares v. Brown & Gay Eng’g, Inc., 401 S.W.3d 363 (Tex. 2013). 32 The IRS issued the Training Materials in 1996 to educate its agents on the difference between employees and independent contractors. The Training Materials, and the more recent Internal Revenue Manual, cover all aspects of worker classification for federal tax purposes, including the common law test and the separate statutory tests for FICA, FUTA and federal income tax withholding. Major statutory independent contractor provisions also are covered, including section 530 of the Revenue Act of 1978. Overall, the Internal Revenue Manual presents a balanced approach for classifying workers as either employees or independent contractors. I.R.S., Internal Revenue Manual, Technical Guidelines for Employment Tax Issues, 4.23.5.3, et seq. (May 22, 2015), available at https://www.irs.gov/irm/part4/irm_04-023-005r.html#d0e183. 33 I.R.S., Internal Revenue Manual, Common Law Standard: Control Test, 4.23.5.6.1, Exh. 4.23.5-1 (Dec. 10, 2013), available at https://www.irs.gov/irm/part4/irm_04-023-005r-cont01.html.

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• the expressed intent of the parties (possibly as revealed by the written contract or by whether the compensation paid the worker is reported on a Form 1099 or a Form W-2); • whether the worker is provided with employee benefits; • whether the worker can be discharged, or the contract terminated, without notice; and • whether the services performed for the business are a key aspect of the regular business activity of the company. The remaining factors of the common law test, such as whether a worker is engaged on a part-time or fulltime basis, the hours that must be worked and the location where the services must be performed, are less determinative of the worker status. The IRS Manual/Training Guidelines provide examples of how the IRS has modified its application of the common law test to better reflect contemporary business practices. For example, the Manual interprets a requirement that a worker wear a uniform or put a business logo on a vehicle as a nonfactor, so long as the uniform or logo is required for security or safety purposes.34 The characterization of a worker under state law is irrelevant with respect to characterization for federal tax purposes.

§ 1.3(b) Economic Realities Test Under federal employment laws, such as the Fair Labor Standards Act (FLSA) or the Family and Medical Leave Act (FMLA), the definition of employee differs from the usual common law rules.35 The U.S. Supreme Court has articulated the general rule that the common law test should be used to determine employee status unless the statute itself defines “employee” more expansively – such as under the FLSA.36 At least since 1948, the federal courts recognized the distinction between an employee for federal tax purposes and for other federal legislative purposes. To illustrate, in In re Miller,37 a case dealing with whether a worker was an employee or self-employed for federal employment tax purposes, the court observed that: [A] separate line of decisions has attempted to define the term “employee” in the context of the Fair Labor Standards Act … that sixpart test cannot be borrowed in toto for [federal employment tax] purposes. Congress and the courts have both recognized that, of all the acts of social legislation, the [FLSA] has the broadest definition of “employee.”38 The starting point for the “economic realities test” is whether the engaging entity has the right to control 34

I.R.S., Internal Revenue Manual, Control Test, 4.23.5.6.1 (5) (Dec. 10, 2013), available at https://www.irs.gov/irm/part4/irm_04-023-005r.html. 35 See, e.g., Real v. Driscoll Strawberry Assocs., Inc., 603 F.2d 748, 754–55 (9th Cir. 1979) (adopting economic realities test for FLSA purposes); Rutherford Food Corp. v. McComb, 331 U.S. 722 (1947). 36 Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 323-35 (1992). 37 In re Miller, 86 B.R. 817 (Bankr. E.D. Pa. 1988). 38 86 B.R. at 820 n.1 (italics in the original) (internal quotations and citations omitted).

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how the work is to be performed by the worker; that is, the usual common law control test. However, the economic realities test also requires an examination of the underlying “economic realities” of the work relationship.39 Thus, “[t]he ultimate concern is whether, as a matter of economic reality, the workers depend on someone else’s business for the opportunity to render service or are in business for themselves.”40 For example, in Rutherford Food Corp. v. McComb, the U.S. Supreme Court ruled that slaughterhouse meat boners were employees, based upon the following facts: • the job duties were interchangeable between workers; • the company supplied the equipment and premises for the work; • the company was the workers’ single source of work; • the company closely supervised the workers’ performance; and • although the workers did profit from their efficiency, they did not enjoy the type of profit generally associated with entrepreneurship.41 The Supreme Court reached this conclusion after evaluating the circumstances of the whole activity; no single factor was considered determinative.

§ 1.3(b)(i) DOL Interpretation of Economic Realities Test In July 2015, the DOL, the agency that enforces the FLSA, issued Administrator’s Interpretation No. 2015-1 (“Interpretation”) signaling a significant shift in how it analyzes independent contractor issues.42 Perhaps the most important change under the Interpretation is the DOL’s position that “most workers are employees under the FLSA.”43 Although the DOL will continue to use the U.S. Supreme Court’s economic realities test to guide its decisions, the control factor (which had long played a central role in DOL classifications) “should not play an oversized role in the analysis of whether a worker is an 44 employee or an independent contractor.” Instead, all factors must be considered in each case and no particular factor “is determinative of whether a worker is an employee.”45 To determine whether the economic realities implicate an employer-employee relationship, the DOL accords emphasis to the following factors:

39

Rutherford Food Corp., 331 U.S. at 727. This test is important because “the fact that the parties … may have entered into a relationship which appeared on paper to be that between a business and an independent contractor is not dispositive of the issue of whether [the] plaintiff was, in reality, an employee as opposed to an independent contractor for FLSA purposes.” Padjuran v. Aventura, 500 F. Supp. 2d 1359, 1362 (S.D. Fla. 2007). 40 Brock v. Superior Care, Inc., 840 F.2d 1054, 1059 (2d Cir. 1988). 41 Rutherford Food Corp., 331 U.S. at 730. 42 See U.S. Dep’t of Labor, Administrator’s Interpretation No. 2015-1 (July 15, 2015), available at http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.pdf. 43 U.S. Dep’t of Labor, Administrator’s Interpretation No. 2015-1 (July 15, 2015), at 2. 44 U.S. Dep’t of Labor, Administrator’s Interpretation No. 2015-1 (July 15, 2015), at 14. 45 U.S. Dep’t of Labor, Administrator’s Interpretation No. 2015-1 (July 15, 2015), at 2.

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1. the extent to which the work performed is an integral part of the employer’s business; 2. the worker’s opportunity for profit or loss depending on his or her managerial skill; 3. the extent of the relative investments of the employer and the worker; 4. whether the work performed requires special skills and initiative; 5. the permanency of the relationship; and 6. the degree of control exercised or retained by the employer.46 The Interpretation notes that the above factors should not be applied as a checklist, because “[u]ltimately, the goal is not simply to tally which factors are met, but to determine whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor).”47 Additional factors considered by the DOL include whether: • the contract gives any right to the engaging party to detail how the work is to be performed; • the engaging party has control over the business of the contractor; • the contract is for an indefinite or relatively long period; • the engaging party may discharge the contractor’s employees; • the engaging party has the right to cancel the contract at will; and • the purported independent contractor is performing work that is the same or similar to that performed by the engaging party’s employees.48 The DOL regards certain factors as immaterial to the determination of employee status, including: whether the worker has a license from a state or local government; the measurement, method or designation of compensation; the fact that no compensation is paid and the worker must rely entirely on tips; the place where the work is performed; and the absence of a formal employment agreement.49 46

U.S. Dep’t of Labor, Administrator’s Interpretation No. 2015-1 (July 15, 2015), at 4. U.S. Dep’t of Labor, Administrator’s Interpretation No. 2015-1 (July 15, 2015), at 2. 48 U.S. DEP’T OF LABOR, FIELD OPERATIONS HANDBOOK ch. 10, § 10b06; see also Scantland v. Knight, 721 F.3d 1308, 1319 (11th Cir. 2013) (finding majority of “economic reality” factors favored a finding that the plaintiff cable, Internet and phone installers and repair technicians were employees and not independent contractors, thus reversing the district court’s grant of summary judgment to employer); Hart v. Rick’s Cabaret Int’l Inc., 967 F. Supp. 2d 901 (S.D.N.Y. 2013) (holding under the FLSA, exotic dancers were employees entitled to minimum wage, not independent contractors, because the strip club exerted significant control over their behavior and had the dominant opportunity for profit, and the dancers had no specialized skills and a limited real investment and were integral to the success of the club). 49 U.S. DEP’T OF LABOR, FIELD OPERATIONS HANDBOOK ch. 10, § 10b07(c). Some of these considerations are contrary to how tax agencies approach the determination of a worker’s status. For example, tax agencies routinely rely upon whether the worker has a license, such as a city business license, in determining worker status. Further, the location where services are performed is often a critical element under the “ABC” test used for state unemployment tax purposes. 47

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§ 1.3(c) Hybrid Test The hybrid test incorporates various elements of the common law and economic realities test. Under the hybrid test, a court evaluates the entity’s right to control the individual’s work process, but also looks at additional factors related to the worker’s economic situation—such as how the work relationship may be terminated, whether the worker receives yearly leave or accrues retirement benefits and whether the entity pays social security taxes on the worker’s behalf.50 As a general rule, because the hybrid test focuses on traditional agency notions of control, it results in a narrower definition of employee than under a pure economic realities test.51 On the other hand, because it considers the economic realities of the working relationship, it may be more inclusive than the common law test.

§ 1.3(d) ABC Test The third major test used to determine a worker’s status is the “ABC test.” The ABC test is used by approximately half the states to determine a worker’s status for purposes of state unemployment insurance laws. Several states use variations on the ABC test, such as using only factors A and B, or only factors A and C. Under the ABC test, a worker is an independent contractor if: 1. there is an ABSENCE of control; 2. the BUSINESS is unusual or away from offices; and 3. the work is CUSTOMARILY done by independent contractors. While providing a fewer number of factors, this test is also far from straightforward, making it very difficult for employers to know whether they are following the law in classifying their workers. It is also generally viewed as being more expansive, meaning that it is much harder to classify a worker as an independent contractor under the ABC test than under the usual common law rules.

§ 1.3(e) Applying the Tests The table below provides general guidance on which test is applicable to which laws: Purpose of Determining Employee Status Federal income taxes Medicare taxes Social Security taxes Federal unemployment taxes Affordable Care Act Age Discrimination in Employment Act

50 51

Agency IRS

Test to Apply Common law

IRS

Common law Economic realities or hybrid

Wilde v. County of Kandiyohi, 15 F.3d 103, 105 (8th Cir. 1994). Hopkins v. Cornerstone Am., 545 F.3d 338, 347 (5th Cir. 2008).

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Purpose of Determining Employee Status

Agency

Test to Apply 52

Americans with Disabilities Act

Common law or hybrid

Employee Retirement Income Security Act (ERISA)

IRS

Common law

Fair Labor Standards Act

DOL

Economic realities

Family and Medical Leave Act Immigration Reform and Control Act

Economic realities Immigrations and Customs Enforcement National Labor Relations Board

Common law

DOL

Common law (the NLRB has a much broader view of the test including indirect control and the contractual or reserved right to control) Common law

EEOC

Common law or hybrid

DOL Worker Adjustment and Retraining Notification (WARN) Act

Unclear, but likely common law because the Act does not provide otherwise53

Copyright laws

Common law

Other federal statutes

Common law, unless the definition of “employee” in the statute is more expansive so as to cover some who might not qualify as an employee under common law.54

National Labor Relations Act

Occupational and Safety Health Act Title VII of the Civil Rights Act

52

Clackamas Gastroenterology Assocs., P.C. v. Wells, 538 U.S. 440 (2003). However, in certain jurisdictions, that test may be irrelevant for workers seeking to bring disability claims under the Rehabilitation Act of 1973 (29 U.S.C. §§ 701 et seq.), which covers persons with disabilities “subjected to discrimination under any program or activity receiving Federal financial assistance.” Fleming v. Yuma Reg’l Med. Ctr., 587 F.3d 938 (9th Cir. 2009) (quoting 29 U.S.C. § 794(a)). The Ninth Circuit Court of Appeals held that independent contractors are covered under section 504 of the Rehabilitation Act. The court reasoned that the Rehabilitation Act is broader than the ADA and, following the reasoning of the Tenth Circuit, concluded that section 504 “addresses only the substantive standards for determining what conduct violates the Rehabilitation Act, not the definition of who is covered under the Rehabilitation Act.” Fleming, 587 F.3d at 944 (quoting Schrader v. Ray, 296 F.3d 968, 972 (10th Cir. 2002)). However, the Sixth and Eighth Circuits have not reached the same conclusion. See Wojewski v. Rapid City Reg’l Hosp., Inc., 450 F.3d 338, 345 (8th Cir. 2006) (holding that the Rehabilitation Act does not apply to independent contractors); Hiler v. Brown, 177 F.3d 542, 545 n.5 (6th Cir. 1999) (noting that the “ADA, ADEA, and the Rehabilitation Act borrowed the definition of ‘employer’ from Title VII”). 53 Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318 (1992). 54 503 U.S. 318.

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Purpose of Determining Employee Status State income taxes State unemployment taxes Related state payroll taxes

Agency

State employment laws (labor codes)

State workers’ compensation

Test to Apply Varies by state; generally common law and ABC tests are used Varies by state; generally common law but may borrow economic realities test used for similar federal laws Varies by state; generally “employee” is broadly defined in a manner similar to the economic realities test

§ 1.3(f) Requests to the IRS to Determine Worker Status Either an employer or a worker can make a request to the IRS for a determination of the worker’s status to resolve federal tax matters. Known as an SS-8 determination, either party initiates the request by filing IRS Form SS-8 entitled “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.”55 Form SS-8 requests various information from both the worker and employer under the three broad categories outlined in the IRS Manual/Training Guidelines (e.g., behavioral control, financial control, relationship of the parties) to determine if the worker is an employee or an independent contractor.56 In addition, IRS Form 8919 allows workers to report unpaid Social Security and Medicare taxes on their personal income tax returns.57 A prerequisite to filing Form 8919 is the filing of Form SS-8. According to 2009 statistics of the Government Accountability Office (GAO), in 72% of the cases the IRS finds an employment relationship, while in only 3% of the cases the IRS finds an independent contractor relationship. In the remaining 25% of cases, no determination is made due to various problems (inability to contact the worker filing Form SS-8, inability to read forms, etc.).58 The Form SS-8 process is becoming an increasingly important audit referral source for the IRS, as it seeks to reduce the use of independent contractors.

55

See http://www.irs.gov/uac/Form-SS-8,-Determination-of-Worker-Status-for-Purposes-of-Federal-EmploymentTaxes-and-Income-Tax-Withholding. 56 I.R.S., Internal Revenue Manual, Common Law Standard: Control Test, 4.23.5.6.1, Exh. 4.23.5-1 (Dec. 10, 2013), available at https://www.irs.gov/irm/part4/irm_04-023-005r-cont01.html. 57 http://www.irs.gov/uac/Form-8919,-Uncollected-Social-Security-and-Medicare-Tax-on-Wages. 58 U.S. Government Accountability Office, Employee Misclassification: Improved Coordination, Outreach, and Targeting Could Better Ensure Detection and Prevention, Aug. 2009, at 21. In April 2015, the GAO published a new report on the contingent workforce; unlike past reports on this topic, however, the report provided no details on misclassification concerns. See U.S. Government Accountability Office, Contingent Workforce: Size, Characteristics, Earnings, and Benefits, Apr. 2015. The results of a new worker classification study by the IRS are not anticipated until 2015 or later. (Treasury Inspector General for Tax Administration, Report No. 2013-30-058, Employers Do Not Always Follow IRS Worker Determination Rulings (June 14, 2013)).

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§ 2 DETERMINING WORKER STATUS FOR FEDERAL TAX PURPOSES § 2.1 “STATUTORY EMPLOYEE” STATUS FOR FEDERAL TAX PURPOSES In addition to persons who are considered employees under the usual common law rules, there are a variety of workers that are treated as “statutory employees” for federal tax purposes. The statutory definitions differ slightly for purposes of FICA and FUTA. As such, an individual can be an employee for FICA taxes, but not FUTA taxes. Likewise, an individual could be subject to FICA taxes and FUTA taxes, but not federal income tax withholding. In determining the status of a worker for tax purposes, each of the three separate taxes must be analyzed separately.

§ 2.1(a) Workers Subject to FICA Taxes For purposes of FICA taxes, the term employee includes: • an officer of a corporation; • an individual determined to be an employee under the common law rules; and • a “statutory employee;” and • certain individuals engaged to perform services for a state or local government agency.59 Statutory employees for FICA tax purposes include any individual who performs services for remuneration for anyone as:60 • An agent-driver or commission-driver engaged in distributing for another: 

meat products;

vegetable products;

fruit products;

bakery products;

beverages other than milk; or

laundry or dry-cleaning services.

• A full-time life insurance salesman. • A home worker who performs work according to specifications provided by the service recipient on material or goods provided by the service recipient that must be returned when the work is completed.

59 60

26 U.S.C. § 3121(d)(1)–(4). 26 U.S.C. § 3121(d)(3)(A)–(D).

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• A traveling or city salesman who is engaged on a full-time basis in the solicitation of sales to wholesalers, retailers, contractors or operators of hotels, restaurants and similar establishments for: 

merchandise for resale, or

supplies for use in the respective business operations.

Statutory employees are subject to additional requirements and qualifications: • the worker’s contract must provide that the worker will personally perform substantially all of the services; • the worker must not have a substantial investment in the facilities used in connection with the performance of services; and • the services must be part of a continuing relationship with the entity for whom the services are being performed, and not in the nature of a single transaction.61 The statutory employee provisions classify an individual—who otherwise may qualify as an independent contractor under the common law rules—to be an employee for purposes of FICA taxes. In addition to the foregoing rules, Internal Revenue Code section 3121 contains a long list of exceptions that have the effect of exempting an individual from FICA taxes. One such exception was limited, however, in a unanimous decision by the U.S. Supreme Court, which ruled medical residents are subject to FICA taxes.62 Congress has excluded from FICA’s demands and taxation, “service performed in the employ of … a school, college, or university … if such service is performed by a student who is enrolled and regularly attending classes at such school, college, or university.”63 Since 1951, the Treasury Department applied the student exemption to students who work for their schools, “as an incident to and for the purpose of pursing a course of study there.”64 In 2004, the Treasury Department adopted an amended rule providing that any employee normally scheduled to work 40 hours or more per week would not be performing services incident to a course of study, and accordingly, would not be an exempt student for purposes of FICA taxation.65 The Supreme Court held the Treasury Department reasonably determined that taxing residents under FICA would further the purpose of the Social Security Act because the residents work long hours, serve as highly skilled professions and share some or all of the terms of employment of career employees.66 Furthermore, exempting the residents from FICA would deprive residents and 67 their families of vital disability and survivorship benefits that Social Security provides. While the common-law status of the medical residents was not in question, and the case was decided under the exclusion from the definition of “employment” for FICA purposes, the decision represents an attempt by the IRS to narrow the scope of certain statutory exclusions.

61 62 63 64 65 66 67

26 U.S.C. § 3121(d)(3). Mayo Found. for Med. Educ. & Research v. United States, 131 S. Ct. 704 (2011). 131 S. Ct. at 709; see also 26 U.S.C. § 3121(b)(10); Treas. Reg. § 31.3121(b)(10)-2(d)(3)(iii). Mayo Found., 131 S. Ct. at 709. 131 S. Ct. at 710. 131 S. Ct. at 715. 131 S. Ct. at 715

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§ 2.1(b) Workers Subject to FUTA Taxes FUTA taxes are imposed on an employer with respect to the wages paid an employee. An employee does not bear any portion of FUTA taxes. Compensation paid to an independent contractor is exempt from FUTA taxes. The term employee has a narrower definition under FUTA than FICA. Internal Revenue Code section 3306(i) defines employee for FUTA identically to FICA, with three exceptions: full-time life insurance salesmen, home workers and state or local government workers are not employees for FUTA tax purposes. In addition, as is the case for FICA taxes, section 3306 contains a long list of exceptions that exempt certain wage payments and kinds of employment from FUTA taxes.

§ 2.1(c) Workers Subject to Federal Income Tax Withholding An employer is required to withhold (and remit to the government) an appropriate amount of federal income taxes from employee’s wages. No withholding is required with respect to compensation paid to an independent contractor. The term employee is defined most narrowly for purposes of federal income tax withholding.

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According to Internal Revenue Code section 3401(c), the term includes only the following types of workers: • an officer, employee or elected official of the United States, a State or a political subdivision thereof or the District of Columbia, or any agency or instrumentality of any one or more of the foregoing; • an officer of a corporation; and • an employee under the common law test.

§ 2.2 “STATUTORY INDEPENDENT CONTRACTOR” STATUS FOR FEDERAL TAX PURPOSES § 2.2(a) Four Types of Statutory Independent Contractors § 2.2(a)(i) Real Estate Agents The Tax Equity and Fiscal Responsibility Act of 1982 deemed real estate agents to be statutory independent contractors.68 Under Internal Revenue Code section 3508(b)(1), a real estate agent is an independent contractor if all of the following conditions are satisfied: • the individual is a licensed real estate agent working as a salesperson; • substantially all of the individual’s remuneration for services performed as a real estate agent is directly related to sales or other output (including the performance of services) rather than to the number of hours worked; and • the individual’s services are performed pursuant to a written contract with the service recipient that identifies the individual as an independent contractor. 69

In Technical Advice Memorandum 94-24003, the IRS concluded that a real estate appraiser did not qualify for the statutory protection because appraisers are not sellers. The taxpayer had relied on Proposed Treasury Regulation section 31.3508-1(b)(2), which allows a real estate seller to qualify, notwithstanding that the individual also performs some appraisal services. The IRS stated in the Memorandum that the appraisal services must be incidental to the selling services. If the appraisal services were predominant rather than incidental to real estate sales, the appraiser would be ruled ineligible for protection under Internal Revenue Code section 3508(b)(1). In Technical Advice Memorandum 96-48003,70 the IRS ruled that loan officers did not qualify as statutory independent contractors, notwithstanding that the applicable state law defined the term real estate salespersons to include loan officers. The IRS reasoned that the treatment under state law of a loan officer is not controlling for purposes of Internal Revenue Code section 3508. The IRS determined that loan solicitation is not an activity that is customarily performed by real estate agents. 68

Some real estate agents have also been held to be independent contractors for purposes of Title VII after the U.S. Supreme Court’s decision in Clackamas Gastroenterology Assocs., P.C. v. Wells, 538 U.S. 440 (2003). See Kakides v. King Davis Agency, Inc., 283 F. Supp. 2d 411 (D. Mass. 2003). 69 I.R.S. Tech. Adv. Mem. 94-24-003 (June 17, 1994). 70 I.R.S. Tech. Adv. Mem. 96-48-003 (Nov. 29, 1996).

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Consequently, the IRS concluded that the loan officers were not eligible for coverage under section 3508.

§ 2.2(a)(ii) Direct Sellers Internal Revenue Code section 3508(b)(2) provides that an individual qualifies as a direct seller—and therefore is, by statute, an independent contractor—if the following criteria are satisfied: 1. the individual is engaged in the trade or business of selling or soliciting the sale of consumer products: (a) to other buyers on a buy-sell basis, a deposit-commission basis, or any similar basis for resale by those buyers or by any other person in a home other than a permanent retail establishment; or (b) in a home other than a permanent retail establishment; 2. substantially all the remuneration for the performance of the services is directly related to sales or other output (including the performance of services) rather than to the number of hours worked; and 3. the services are performed pursuant to a written contract with the service recipient that provides that the individual will not be treated as am an employee with respect to such services for federal tax purposes).71 The definition of a consumer product appears to be expansive, including both tangible and intangible products.72 However, one issue that remains controversial involves the type of activities that qualify as “sales.” The IRS ruled that canvassers and closers that solicited the sale of home improvements qualified as direct sellers for purposes of Internal Revenue Code section 3508.73 According to the facts of the ruling, canvassers made the initial visit to a potential customer and, if the visit was promising, the prospect was referred to a closer. The closer would follow up with another appointment and seek to close the sale. Canvassers were compensated based on the number of appointments scheduled, and closers’ commissions were based on the dollar value of actual contracts. Both were ruled to qualify as direct sellers, and therefore, independent contractors.

§ 2.2(a)(iii) Newspaper Distributors & Carriers A person engaged in the trade or business of delivering or distributing newspapers or shopping news (including services directly related to such trade or business, such as soliciting customers or collecting receipts), qualifies as a statutory independent contractor, provided that: 1. substantially all the remuneration derived from the performance of services is directly related to sales or other output, rather than to the number of hours worked; and 2. the services are performed pursuant to a written contract between the person and the service recipient that provides that the person will not be treated as an employee for federal tax purposes.74

71

26 U.S.C. § 3508 (b)(2). See I.R.S. Tech. Adv. Mem. 95-30-001 (Apr. 13, 1995) (home improvement projects qualify as consumer products); R Corp. v. United States, 94-2 U.S. Tax Cas. (CCH) ¶ 50,380 (M.D. Fla. 1994) (cable television subscriptions qualify as a consumer product); Cleveland Inst. of Elecs., Inc. v. United States, 787 F. Supp. 741 (N.D. Ohio 1992) (home study educational courses qualify as consumer products). 73 I.R.S. Tech. Adv. Mem. 95-30-001 (Apr. 13, 1995). 74 26 U.S.C. § 3508 (b)(2). 72

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The statutory independent contractor status applies for purposes of income and employment taxes. The statutory independent contractor status is intended to be available to newspaper distributors and carriers, whether or not they hire others to assist in the delivery of newspapers. In addition, the statutory status is intended to apply to newspaper distributors and carriers who operate under either a buy-sell distribution system where the worker purchases the newspapers from the publisher for resale or an agency distribution system where the worker is paid by the publisher based on the number of newspapers delivered.

§ 2.2(a)(iv) Sitter-Referral Agencies The sitter-referral agency safe-harbor is a relatively obscure provision—except, of course, to the affected businesses. The provision applies to businesses engaged in referring sitters. Sitters are defined as individuals engaged to provide personal attendance, companionship or household care services to children or to individuals who are elderly or have a disability.75 A business that refers sitters to clients shall not be treated as the sitters’ employer for federal employment taxes. In addition, Internal Revenue Code section 3506 states that the sitter shall not be treated as an employee of the business. The safe harbor applies only if the following requirements are met: • the business does not pay or receive the compensation paid to the sitter; and • the business is compensated by the sitter or by the person who engages the sitter on a fee basis. A critical factor in a referral agency’s eligibility for protection under section 3506 is that the compensation for services performed must be paid to the sitter and not to the agency. For example, in Revenue Ruling 80-365, 1980-2 C.B. 300, the IRS concluded that sitters were employees of an agency if it billed the client, extracted a fee and, in turn, paid the sitters. Section 3506 applies only with respect to the relationship between the referral agency and the sitter; it does not apply to the relationship between the sitter and the client for whom the services are actually performed. Thus, a sitter could be deemed an employee of a client notwithstanding the application of section 3506.

§ 2.2(b) Section 530 of the Revenue Act of 1978: Safe Harbor Provision There are safe harbor provisions allow certain workers to qualify as independent contractors by law. The most widely used safe harbor for businesses (i.e., taxpayers) is contained in section 530 of the Revenue Act of 1978.76 Unlike most tax provisions, section 530 has never been incorporated into the Internal Revenue Code. While not technically a statutory independent contractor category, section 530 is perhaps the most significant provision that recognizes a taxpayer’s independent contractor treatment of workers and provides relief from federal employment tax obligations regarding qualified workers. Section 530 grew out of taxpayer complaints about overzealous IRS efforts seeking to reclassify workers to 75

26 U.S.C. § 3506(b). Pub. L. No. 95-600, 92 Stat. 2763, 2885 (Nov. 6, 1978) (as amended and codified at 26 U.S.C. 3401 notes) (hereinafter “Revenue Act of 1978, § 530”).

76

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employee status. Prior to the 1970s, IRS audits only occasionally included an examination of worker status issues; businesses generally relied on their own judgment or industry practice in determining a worker’s status. Beginning in the early 1970s, however, the IRS significantly increased its efforts to reclassify workers as employees. By the late 1970s, Congress reacted by enacting section 530. The provision was intended to curb the IRS’s challenges to independent contractor classifications. Originally enacted as an interim relief measure, Congress subsequently extended it indefinitely and amended it several times.77 The 1996 Amendments, among other things, resolved a court split regarding the burden of proof and changed the dynamics of application of the statute by requiring the IRS to determine if a business (i.e., taxpayer) is entitled to section 530 protection before taking any further steps in auditing for worker classification issues.78

§ 2.2(b)(i) Overview of Requirements of Section 530 Protection According to section 530, a company may obtain employment tax relief and continue to classify its workers as independent contractors if it: 1. has consistently treated the workers (and similarly situated workers) as independent contractors for employment tax purposes (“consistent treatment requirement”); 2. has filed all federal tax returns (including Form 1099 and any other information returns required) for the tax period consistent with the workers’ non-employee status; and 3. had a “reasonable basis”79 for treating the workers as independent contractors.80 As noted above, Section 530 requires the IRS to first determine whether section 530 applies before considering the common law test. Further, it applies even if the workers might otherwise be found to be common law employees under the common law test. Generally, the IRS must provide the taxpayer with a written notice that explains section 530 before initiating an audit relating to the employment status of workers.81 However, if the IRS has already identified a worker classification issue, IRS Manual/Training Guidelines state that the notice can be provided during the initial interview.82 If the IRS is conducting a different type of examination and finds a worker classification issue, it must provide the notice to the company/taxpayer at that time. Burden of Proof A taxpayer must first establish a prima facie case that it was reasonable not to treat a worker as an employee. The burden of proof then shifts to the IRS to prove that the taxpayer is not eligible for section 530. The burden of proof remains with the IRS for all aspects of section 530 except the issue 77

Tax Equity and Fiscal Responsibility Act of 1982 (extending Section 530 indefinitely); Tax Reform Act of 1986, §1706 (excepting certain technical workers); Small Business Job Protection Act of 1996, § 1122. 78 Previously, given the narrow construction of the statute as an “exception to a misclassification determination,” the IRS would conduct an audit first and after finding misclassification—and perhaps other tax violations--only then could the company petition the IRS for the section 530 safe harbor, which was often a lengthy process and left the company at risk of compounding back taxes. 79 See, e.g., Peno Trucking, Inc. v. Commissioner, 296 F. App’x 449 (6th Cir. 2008) (holding that company could rely upon state administrative proceedings that applied common law rules for purposes of safe harbor). 80 Revenue Act of 1978, § 530(a)(1). 81 Revenue Act of 1978, § 530(e)(1). 82 I.R.S., Internal Revenue Manual, Section 530 Relief, 4.23.5.2.1 (Dec. 10, 2013), available at https://www.irs.gov/irm/part4/irm_04-023-005r-cont01.html.

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of whether a taxpayer has demonstrated a reasonable basis “in some other manner.”83 For the burden of proof to shift, a taxpayer must fully cooperate with reasonable requests by the IRS for information on the issue. A request for information by the IRS will not be treated as reasonable if the information requested does not relate to the taxpayer’s basis for claiming section 530 protection, or if compliance would be impracticable for the taxpayer given the particular circumstances and the relative costs involved. Limitations on Section 530 Section 530 is subject to important limitations. For example, section 530 applies to the businesstaxpayer only and not to the worker. This means that while section 530 protects a company (that satisfies the requirements) against any federal employment tax liability with respect to a worker, section 530 does not provide the worker with any such protection. Thus, if a worker were determined to be an employee of a business under the common law test, but the business is eligible for protection under section 530, the business would not be liable for any federal employment taxes with respect to the worker, but the worker would remain liable for the employee share of FICA taxes on compensation received from the business. The employer share of FICA taxes would not be paid. On the other hand, if the worker were determined to be an independent contractor, the worker would be liable for the full amount of FICA taxes on compensation received from the business. Section 530 is also limited to only federal employment taxes and not to federally regulated ERISA employee benefit plans. The primary significance of this limitation is its potential effect on the employee benefit plans maintained by a company. If a company was eligible for section 530 protection with respect to a group of workers, but the workers were determined to be employees under the common law test, the workers could be treated as employees for purposes of the company’s benefit plans if such plans did not adequately exclude such workers. Additionally, section 1706 of the Tax Reform Act of 1986 (the provision is commonly referred to as “section 1706”) excludes from section 530 protection “technical personnel” who provide services for a business through a third party. Technical personnel are defined as engineers, designers, drafters, computer programmers, systems analysts and other similarly skilled workers engaged in a similar line of work.84 Therefore, if a business contracts with a third party to provide a computer programmer to perform services, and the business classifies the programmer as an independent contractor, section 1706 denies the section 530 protection with respect to the business’s classification of the programmer as an independent contractor because: (1) the worker qualifies as a “technical” worker; and (2) the worker is engaged through a third party. By contrast, if the business engaged the programmer directly as an independent contractor, section 1706 would not apply and section 530 protection could be available. Other limitations remain controversial. For example, it is unclear whether section 530 applies to a 85 86 state or local government agency or corporate officers.

83

Revenue Act of 1978, § 530(e)(4). Revenue Act of 1978, § 530(d). 85 See I.R.S. Tech. Adv. Mem. 94-43-002 (Dec. 3, 1993). 86 However, in Chief Counsel Advice Memoranda 200038045 (Aug. 9, 2000), the IRS reached the conclusion that such officers may be excluded under section 530 if they were consistently treated as contractors, received IRS Form 1099-MISC and there was a reasonable basis for such treatment. 84

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§ 2.2(b)(ii) Consistent Treatment Requirement Under Section 530 To meet the “consistent treatment” requirement, for any period after December 31, 1977, a business must have treated the worker, and all other workers holding substantially similar positions, as independent contractors for the purposes of federal employment taxes.87 The IRS defines the term treat as the treatment of workers for purposes of federal tax laws.88 Identifying “Substantially Similar” Workers Whether one worker is substantially similar to another is an intensely factual issue subject to subtle distinctions. In Revenue Ruling 87-41, 1987-1 C.B. 296, the IRS indicated that the determination “requires an examination of all the facts and circumstances, including particularly the activities and functions held by the respective individuals.” One of the factors to consider is the relationship of the parties, including the degree of the company’s supervision and control. There may, however, be flexibility in differentiating classes of workers. For example, in North Louisiana Rehabilitation Center, Inc. v. United States, the operator of a for-profit hospital contracted with physicians who served as medical and program directors under independent contractor agreements.89 The court found that one group of workers was employees while another group of workers was independent contractors, although the workers were similarly situated. The group determined to be employees was engaged on a full-time basis and the employees had their schedules dictated by their employer and worked exclusively for that entity. The independent contractors, engaged by another related company, spent far less time engaged, principally acted as consultants and maintained private practices. Not only were the positions distinguishable, but the IRS also applied the consistent treatment factor separately for each entity. The court ruled in favor of section 530 90 protection. In contrast, in Kentfield Medical Hospital Corp. v. United States, the federal court was stricter in its application of the consistent treatment requirement.91 There, the director of psychological services had been hired as an employee and then became a contractor. Other psychologists were treated as contractors. While the court applied the consistent treatment requirement separately with respect to each psychologist, the court also required consistency throughout the business relationship and even a short-term difference in treatment violated the substantive consistent treatment requirement. The holding in Kentfield was more stringent than the IRS position, as articulated in a 2002 Chief Counsel Advisory No. 200211037, wherein the IRS applied the consistent treatment requirement separately with respect to each year.92 Nevertheless, when read together, these cases illustrate that section 530 relief should be considered separately for each legal entity.

State-Law Treatment Irrelevant 87

Revenue Act of 1978, § 530(a)(1), (c)(1) (tax imposed by 26 U.S.C. subtitle C). Rev. Proc. 85-18, 1985-1 C.B. 518. 89 179 F. Supp. 2d 658 (W.D. La. 2001). 90 See also Select Rehab, Inc. v. United States, 205 F. Supp. 2d 376 (M.D. Pa. 2002) (within a single organization, the employee-medical directors were not substantially similar to the contractor-medical directors because the employees did not maintain private practices, worked substantially full-time and were subjected to significant supervision and control). 91 215 F. Supp. 2d 1064 (N.D. Cal. 2002). 92 I.R.S. Chief Counsel Advisory No. 200211037, Application of Section 530 of the Revenue Act of 1978 (Mar. 15, 2002), available at http://unclefed.com/ForTaxProfs/irs-wd/2002/200210000.html. 88

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Treating a worker as an employee under state laws would not violate the consistent treatment requirement. In Private Letter Ruling 93-38039 (June 29, 1993), the IRS ruled that the payment of state unemployment taxes and the withholding of state income taxes did not violate the consistent treatment requirement, so long as the compensation paid to the worker was not reported on the federal Form W-2 and the worker was otherwise treated as an independent contractor for purposes of federal taxes.93 Similarly, at least one state court has held that a state is not bound by section 530 classifications at the federal level.94

Predecessor Businesses The consistent treatment requirement also applies to a predecessor business.95 Thus, for example, if a proprietorship treats couriers as employees and later is incorporated, the incorporated business could not qualify for section 530 protection with respect to couriers because its predecessor (the proprietorship) treated that same type of worker as an employee.

§ 2.2(b)(iii) Federal Tax Form Reporting Requirement Under Section 530 A business satisfies section 530’s federal tax form reporting requirement if it reports on a Form 1099 the amount of compensation it paid to each worker who earned at least $600 during the calendar year at issue.96 An important issue under this requirement concerns the reporting obligations of a taxpayer that contracts with a worker to perform services for a client, where the worker is paid by the client (instead of by the business/taxpayer). Under those circumstances, the issue is whether the taxpayer can qualify for section 530 protection without reporting the amount of compensation paid to the worker on the grounds that the taxpayer had no duty to report amounts it did not pay. For example, in a series of older cases, adult clubs conceded they did not report any payments made to exotic dancers who performed services for patrons on Form 1099s, but claimed they had no duty to do so because the dancers were paid solely by the customers.97 The courts agreed with the clubs that they had no duty to report on Form 1099s any amounts earned by the dancers because the clubs had not made the payments to the dancers. Therefore, for businesses that contract with a worker to perform services for a third party, where the third party (and not the taxpayer) pays the worker, the taxpayer can satisfy the “federal tax form reporting requirement” of section 530 without reporting on a Form 1099 any

93

Accord I.R.S. Tech. Adv. Mem. 93-36-005 (June 2, 1993). Crew One Prods., Inc. v. State, 149 S.W.3d 89 (Tenn. Ct. App. 2004). 95 See I.R.S., Internal Revenue Manual, Establishing Section 530 Relief, Consistency Requirement, 4.23.5.2.2 (Dec. 10, 2013), available at https://www.irs.gov/irm/part4/irm_04-023-005r-cont01.html; Rev. Proc. 85-18, 1985-1 C.B. 518. 96 Rev. Proc. 85-18 also requires Form 1099 to be timely filed. Although at least one court has criticized this requirement, businesses are still advised to timely file required returns in order to avail themselves of the section 530 safe harbor. See Medical Emergency Care Assocs., S.C. v. Commissioner, 120 T.C. 436 (2003). 97 Déjà vu-Lynnwood, Inc. v. United States, 21 F. App’x 691 (9th Cir. 2001); see also Marlar, Inc. v. United States, 151 F.3d 962 (9th Cir. 1998) (club could act as a financial intermediary or disburser of funds because it made no “payments” when it exchanged cash for “Extasy Bucks” given to dancers by customers); Cinema Art Theatre of Springfield, Inc. v. United States, 46 F. Supp. 2d 812(C.D. Ill. 1999) (finding nightclub’s position to not file 1099 Forms was reasonable because customers paid the dancers directly); Taylor Boulevard Theatre v. United States, 98-2 U.S. Tax Cas. (CCH) ¶ 50,521 (W.D. Ky. 1998) (club did not “pay” dancers where it charged dancers a nightly lease fee consisting of a fixed “minimum-shift rent” plus a percentage of the amount earned from each private dance). 94

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amounts the third party paid to the worker.98 Similarly, in a Chief Counsel Advisory (CCA), the IRS concluded that a bail bond company satisfied the federal tax form reporting requirement even though it did not report any commission amounts earned by its soliciting agents.99 According to the ruling, customers paid the gross premium on a bail bond directly to the agent and the agent remitted to the company only a net amount, after subtracting the agent’s commission. Since the bail bond company did not “pay” any amounts to the agents, it had no reporting duty for purposes of section 530.100 However, even though the tax reporting requirement was deemed satisfied for purposes of section 530, the IRS concluded that the bail bond company could be subject to a penalty under Internal Revenue Code section 6041(a) for failing to comply with the underlying Form 1099 requirement, which applies without regard to section 530.101

§ 2.2(b)(iv) Reasonable Basis Requirement Under Section 530 Reasonable basis can be established by showing that the taxpayer’s treatment of a worker as nonemployee was in reasonable reliance on any of the following: • acceptable precedent;102 • a prior IRS audit of the taxpayer;103 • industry practice;104 or • other reasonable basis (“some other manner”). The IRS considers the first three as “safe harbor” provisions and the burden of proof shifts to the IRS once the taxpayer has established a prima facie showing. For the fourth (“some other manner”), the 98

Although the above line of cases regarding the adult dance club industry were successful in satisfying the requirements of section 530 at the time, industry practice can change, thus, similar circumstances may not always satisfy the reasonable basis requirement of section 530 (see § 2.2(b)(iv)). Compare Marlar, Inc. v. United States, 151 F.3d 962 (9th Cir. 1998) (club’s reliance on long-standing, recognized industry practice in the Seattle area of treating nude dancers as lessees, not employees, was reasonable), and Taylor Boulevard Theatre v. United States, 98-2 U.S. Tax Cas. (CCH) ¶ 50,521 (W.D. Ky. 1998) (finding club had reasonable basis for treating dancers as nonemployees based on industry standard, and consulting with legal and accounting experts), with Clincy v. Galardi S. Enters., 808 F. Supp. 2d 1326 (N.D. Ga. 2011) (finding exotic dancers were employees not independent contractors under the FLSA), and Smith v. TYAD, Inc., 209 P.3d 228, 235 (Mont. 2009) (noting the state’s DOL and Workers’ Compensation Court found the dancers were employees for purposes of state discrimination and workers’ compensation law). 99 I.R.S. Chief Counsel Advisory 50035 (Dec. 17, 1999). 100 I.R.S. Chief Counsel Advisory 50035 (Dec. 17, 1999). 101 In Chief Counsel Advice (CCA) 201106009 (April. 28, 2010, released Feb. 11, 2011) and 201106010 (Dec. 1, 2010, released Feb. 11, 2011), the IRS determined that amounts paid by adult entertainment clubs, bars and other establishments to taxicab drivers who deliver passengers to the establishments are income to the drivers, not tips received by the drivers in the course of their employment with taxicab companies. Rather, the payments are for services separate and distinct from the drivers’ employment, and thus the establishments making the payments are responsible for issuance of Form 1099 to the drivers. These CCAs, while not specifically about section 530, address tax reporting obligations in the context of third party situations, and thus provide useful guidance for when a Form 1099 must be issued. 102 Revenue Act of 1978, § 530(a)(2)(A). 103 Revenue Act of 1978, § 530(a)(2)(B). 104 Revenue Act of 1978, § 530(a)(2)(C).

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taxpayer bears the burden of proof.105 The IRS acknowledges that Congress intended the reasonable basis standard to be construed liberally in favor of the taxpayer.106 The taxpayer must show that it actually and reasonably relied on the asserted reasonable basis during the periods at issue and at the time the employment decisions were being made.107 Each reasonable basis is discussed separately below. Acceptable Precedent A taxpayer can establish a reasonable basis based on acceptable precedent if the taxpayer can cite to judicial precedent or a published ruling that supports its classification of the worker at issue as an independent contractor. In addition, a taxpayer may rely on a technical advice memorandum or a private letter ruling that is issued to that specific taxpayer. Prior IRS Audit A prior IRS audit consists of a past IRS audit of the taxpayer in which there was no assessment attributable to the treatment of individuals holding positions substantially similar to the position held by the worker at issue. However, the 1996 Amendments to section 530 made it more difficult for a taxpayer to establish a reasonable basis premised on a prior IRS audit. —An IRS audit commencing after December 31, 1996 can be relied upon to establish a reasonable basis only if the taxpayer can demonstrate the audit included a determination of whether the specific worker involved, or a worker holding a substantially similar position, was properly classified as an independent contractor. The IRS has determined that a business can establish a reasonable basis for purposes of section 530 based on an IRS audit of a predecessor business.108 The Training Guidelines indicate that an IRS audit of a predecessor business will not satisfy the prior IRS audit safe harbor, but that a taxpayer’s reliance on such an audit might constitute a reasonable basis established “in some other manner.” Based on previous arguments by taxpayers that they should be allowed to rely on an IRS “compliance check” for purposes of establishing protection under section 530, the IRS released guidance making clear that a compliance check is limited to a review of information forms that the IRS requires a taxpayer to file or maintain.109 The guidance states that taxpayers are not to be questioned about particular liabilities or about worker classification issues. Furthermore, a compliance check will evolve into an audit—which can be relied upon by the taxpayer for the purpose of establishing protection under section 530—if the IRS questions the taxpayer about worker classification issues. Industry Practice The industry-practice safe harbor requires a showing of a “long-standing” recognized practice of a “significant segment” of the industry in which the type of worker at issue is classified as an

105

Revenue Act of 1978, § 530(e)(4). Rev. Proc. 85-18, 1985-1 C.B. 518. 107 Nu-Look Design, Inc. v. Commissioner, T.C. Mem. No. 2003-52, aff’d, 356 F.3d 290 (3d Cir. 2004). 108 Rev. Rul. 83-152, 1983-2 C.B. 172; see also World Mart, Inc. v. United States, 93-1 U.S. Tax Cas. (CCH) ¶ 50,304 (D. Ariz. 1992) (holding that an audit of four out of five brother-sister corporations that all were engaged in the same business could constitute a reasonable basis for purposes of establishing section 530 protection for all five corporations). 109 I.R.S., Internal Revenue Manual, Compliance Check Defined, 4.90.3.2 ( Feb. 1, 2008); Conducting a Compliance Check, 4.90.3.5 (Dec. 16, 2011), available at http://www.irs.gov/irm/part4/irm_04-090-003.html.

106

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independent contractor. Significant segment is defined as 25% or more of an industry.110 The term long-standing is defined as a practice that has been in existence for ten years or more.111 A lower percentage or a shorter time period may still qualify, depending on particular facts and circumstances.112 An industry practice for purposes of section 530 is determined by taking into account only those other businesses that are engaged in a similar type of business, in the same geographic area as the company.113 For example, to determine if a trucking company conforms to industry practices, it is compared with other operator businesses and not large Interstate Commerce Commission carriers.114 A critical requirement of establishing the industry-practice/reasonable basis is that the taxpayer be affirmatively aware of the industry practice at the time that it decides to treat workers as independent contractors. The IRS reasons that a taxpayer cannot rely on an industry practice unless it knows the practice exists. One of the best ways to demonstrate knowledge of an industry practice is to undertake a survey. In 303 West 42nd St. Enterprises v. IRS, the taxpayer unsuccessfully sought to have the trial court set aside a jury verdict involving the tax status of “fantasy booth” performers.115 The New York City taxpayer offered the testimony of New Jersey club owners that it was the industry practice in New Jersey to treat such performers as independent contractors. The taxpayer also relied on a prior IRS audit and advice received from an accountant. The taxpayer contended that the evidence established a reasonable basis. The court found that New Jersey club owners operated in a different geographic region from New York City. Therefore, testimony from New Jersey club operators could not establish the industry practice in New York City. Furthermore, the accountant’s advice largely relied on industry information provided by the taxpayer with respect to other businesses the taxpayer also owned. The accountant, when offering his opinion, did not have access to all relevant information. As to the audit, the court found it questionable that there was actual reliance on the audit when the taxpayer engaged the dancers. The case illustrates the importance of a thorough investigation of industry practices before setting up a business. For example, some businesses have found it helpful to conduct a survey of competitors in their area before commencing operations and at regular intervals thereafter.116 Additionally, it is a reminder of the importance of maintaining good documentation of industry practices and of providing any professionals from whom you are seeking advice with full and complete disclosure. 110

Revenue Tax Act of 1978, § 530(e)(2)(B). Revenue Tax Act of 1978, § 530(e)(2)(C)(i). 112 I.R.S., Internal Revenue Manual, Safe Haven - Industry Practice, 4.23.5.2.2.6 (Dec. 10, 2013), available at https://www.irs.gov/irm/part4/irm_04-023-005r-cont01.html. 113 General Inv. Corp. v. United States, 823 F.2d 337 (9th Cir. 1987). 114 Sanderson v. United States, 862 F. Supp. 196 (N.D. Ohio 1994), order vacated & complaint dismissed, 876 F. Supp. 938 (N.D. Ohio 1995). 115 2000 U.S. Dist. LEXIS 6922 (S.D.N.Y. May 22, 2000). 116 See, e.g., Options for Senior Americans Corp. v. United States, 11 F. Supp. 2d 666 (D. Md. 1998). In Technical Advice Memorandum 96-19001 (May 1, 1996), the IRS rejected a claim of section 530 protection by an individual who started a courier business and treated the couriers as independent contractors. The IRS reasoned that the individual neglected to conduct a survey of other courier companies in its market to determine the industry practice. This ruling is noteworthy because the individual had worked for six different courier companies in the same metropolitan area prior to starting his own business. The IRS characterized that experience as insufficient evidence of his knowledge of industry practice. 111

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The industry-practice standard also raises interesting questions for the modern “sharing economy,” which is on the cusp of celebrating its tenth anniversary. The use of the sharing model has spread to new industries and involves new players—nearly all of which use independent contractors in their business model. It remains to be seen whether such players will be able to use the industry-practice standard in establishing the section 530 safe harbor, particularly if courts determine the classification of workers as independent contractors was wrong in the first place. Establishing Reasonable Basis in “Some Other Manner” Demonstrating reasonable basis “in some other manner” is limited only by the creativity of a taxpayer and its advisors. The Training Guidelines acknowledge that a business that makes a reasonable effort to establish independent contractor treatment for its workers under the common law, but falls just short of satisfying the common law standard, may be protected by a valid section 530 safe harbor. In Peno Trucking, Inc. v. Commissioner, the Sixth Circuit Court of Appeals found it was reasonable for a trucking company to rely upon state administrative rulings that applied a common law test that was virtually identical to the federal common law.117 The case is significant because it reaffirms the right to section 530 tax relief based on a reasonable reliance upon the common law independent contractor factors, even if those factors are established by a state agency or court. The Training Guidelines further confirm that reliance on the advice of an attorney or accountant can constitute a reasonable basis. The Training Guidelines state that while a business need not independently investigate the credentials of the tax adviser, it should, at a minimum, establish that it reasonably believed the adviser to be familiar with business tax issues and that the advice was based on sufficient relevant facts. The Training Guidelines also state that the advice must have been provided when the treatment of the affected workers as independent contractors began, and that advice given after the treatment began would not suffice.118 In Select Rehabilitation, Inc. v. United States, the court held that reliance on the advice of the taxpayer’s own legal department provided a reasonable basis.119 Furthermore, against the IRS’s contention that the taxpayer would need to present evidence of specific advice given, the court determined that the only requirement is the taxpayer’s reliance on advice of counsel itself. Despite this decision, other courts have held that the advice from an attorney or accountant is not sufficient.120 Therefore, it is advisable that taxpayers establish that there was an actual review and consideration of the relevant facts and that the tax advisors were experienced with such matters. Such records may allow taxpayers to persuade the IRS at the administrative level to avoid litigation.

§ 2.2(c) Engaging Former Employees as Independent Contractors Engaging former employees as independent contractors can be risky (e.g., the company’s eligibility for the Section 530 safe harbor provisions will be reduced as it could appear the company was 117

296 F. App’x 449 (6th Cir. 2008). I.R.S., Internal Revenue Manual, Other Reasonable Basis, 4.23.5.2.2.7 (Dec. 10, 2013), available at http://www.irs.gov/irm/part4/irm_04-023-005r.html. 119 205 F. Supp. 2d 376 (M.D. Pa. 2002). 120 See generally United States v. Boyle, 469 U.S. 241, 251 (1985) (holding that the taxpayer’s good-faith reliance on advice of tax attorney or accountants was not a sufficient defense); see also Ewen & Miller, Inc. v. Commissioner, 117 T.C. 263 (2001) (court disregarded the petitioner’s reliance on the advice of counsel and found no other reasonable basis for section 530 relief presented). 118

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“inconsistent” in its treatment of worker). However, under certain circumstances it can be accomplished. In IRS Private Letter Ruling 93-45002 (1993), the IRS made different determinations concerning former employees who were engaged as independent contractors. The individuals each had consulting contracts that provided for: (1) a stated number of hours of consulting services (part-time); (2) compensation at an annual rate, to be paid whether or not consulting services were required; (3) expiration of the contract at a fixed time; (4) no specific hours (time of day); (5) no right to recall a worker from vacation or illness; (6) freedom to contract with other companies; and (7) maintenance of separate office space. The IRS concluded that four of the executives, including a former chief executive officer, qualified as independent contractors partly because they received a fraction of their prior salary to provide part-time advisory services on an irregular basis. In providing consulting services, each of the four former executives was free to follow his or her own established routine and schedule and none was under supervision. On the other hand, the IRS held that two of the former executives remained employees. These two executives worked up to 75% of the time that they had worked prior to retirement and were assigned to highly specific duties at fairly regular hours.121 Engaging an incorporated former employee may not avoid IRS scrutiny. Two former school superintendents set up a corporation and a limited liability corporation through which they provided the same services as they had as employees. In Chief Counsel Advisory 200147006 (Nov. 23, 2001), the IRS determined that they were also employees for tax purposes under a common-law analysis, in part because the roles they continued to fill were “employee” positions. Mass conversion of employees to contractor status carries risks as well. In Ewens & Miller, Inc. v. Commissioner, the entire bakery workforce was converted unilaterally into independent contractors without any substantive change to the business relationship, based on counsel’s questionable advice.122

§ 2.2(d) Dual-Status Workers The IRS and courts traditionally have recognized that a worker can be engaged by one entity as both an employee and as an independent contractor. In those circumstances, at the end of a calendar year, the entity would issue the worker both a Form W-2 (to report employee wages) and a Form 1099 (to report compensation of at least $600 earned as an independent contractor). In a 1999 Private Letter Ruling, the IRS clarified that a worker can qualify as a dual-status worker, 123 provided that the worker is engaged in a different function for each status. Alternatively, a worker can qualify for a dual status if engaged in a different aspect of a single function, provided that each aspect is independent of the other and the method of payment for each is different. In the ruling, a worker was engaged to prepare transcripts as an independent contractor and paid on a job-by-job basis. Separately, the individual was engaged by the same entity to attend and record proceedings and paid a fixed salary. The IRS approved the entity’s treatment of the worker in those dual capacities. 121

For additional IRS rulings on this issue, see I.R.S. Priv. Ltr. Rul. 00-06033 (Feb. 11, 2000) (ruling that a technical service specialist engaged to perform function formerly performed was an employee); I.R.S. Priv. Ltr. Rul. 91-38017 (Sept. 20, 1991) (ruling that a packaging operator engaged to perform similar services was an employee). 122 117 T.C. 263 (2001). 123 I.R.S. Priv. Ltr. Rul. 99-14044 (Apr. 9, 1999).

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In a 2000 Private Letter Ruling, the IRS found an otherwise statutory independent contractor to be a “dual status” worker. A realtor acted as both a real estate agent as well as the company’s office manager.124 For him to be treated as an independent contractor, “substantially all remuneration”125 (90% or more) he received must have been for services performed as a real estate agent. In this case, the realtor also acted as the office manager and was paid accordingly. The IRS ruled that as to income received as realtor, the individual was self-employed. As to the income received as office manager, it constituted employment and was considered taxable wages.

§ 2.3 CORRECTING MISCLASSIFICATION OF INDEPENDENT CONTRACTORS FOR FEDERAL TAX PURPOSES Employers that have misclassified workers as independent contractors may avail themselves of the two settlement programs developed by the IRS for companies (taxpayers) to voluntarily correct the misclassification for federal tax purposes.

§ 2.3(a) IRS Classification Settlement Program In 1996, the IRS instituted the Classification Settlement Program (CSP) for companies (taxpayers) currently under IRS investigation.126 This program allows IRS examiners to settle certain worker-classification disputes under favorable financial terms in exchange for the company agreeing to prospectively reclassify the workers at issue and all other workers holding substantially similar positions as employees. Although the CSP initially was established on a trial basis for a limited period of time, the IRS announced an indefinite extension of the CSP “until further notice.”127 The IRS indicated that the program, which is entirely voluntarily, has generated positive feedback from taxpayers.

§ 2.3(b) IRS Voluntary Classification Settlement Program In 2011, the IRS launched a second program—the Voluntary Compliance Settlement Program (VCSP).128 Revised in 2012, this program enables companies (taxpayers) to resolve past federal employment tax issues related to worker classification by paying a small amount of tax in exchange for prospective reclassification of contractors as employees for federal employment tax purposes.129 The VCSP differs from the CSP—the CSP is meant for companies currently under audit, whereas the VCSP is specifically for those not currently under an employment tax audit. According to the IRS, this second program was developed “to provide taxpayers with a program that allows for voluntary reclassification of workers as employees outside of the examination context and without the need to go through normal administrative correction procedures applicable to employment taxes.”130

124

I.R.S. Priv. Ltr. Rul. 20-0033014 (Aug. 18, 2000). Prop. Treas. Reg. § 31.3508-1(d)(1). 126 Classification Settlement Program, available at http://www.irs.gov/irm/part4/irm_04-023-006.html. 127 I.R.S. Notice 98-21, 1998-15 I.R.B. 14. 128 I.R.S. Bulletin No. 2011-41, Announcement 2012-64, Voluntary Classification Settlement Program (Oct. 11, 2011), available at http://www.irs.gov/irb/2011-41_IRB/ar14.html. 129 I.R.S. Bulletin No. 2012-51, Announcement 2012-45, Voluntary Classification Settlement Program (Dec. 17, 2012), available at http://www.irs.gov/irb/2012-51_IRB/ar16.html. 130 I.R.S. Bulletin No. 2012-51. 125

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To be eligible for the VCSP, the company (taxpayer) must: • have consistently treated the workers as non-employees in the past; • have filed all required Forms 1099 for the workers at issue for the previous three years; • not currently be under audit by the IRS for employment tax issues (other types of audits do not make an taxpayer ineligible), and if the taxpayer is a member of an affiliated group within the meaning of section 1504(a)), no members of the affiliated group can be under an employment tax audit; • not currently be under audit by the DOL or a state agency concerning the classification of the workers at issue; and • not be contesting in court the classification of the class or classes of workers from a previous audit by the IRS or DOL. If a taxpayer was previously audited by the IRS or the DOL concerning the classification of the class or classes of workers, it is still eligible for the VCSP provided it has complied with the results of that audit and is not currently contesting the classification in court. To participate, the taxpayer must submit an application and enter into a closing agreement with the IRS in which the taxpayer agrees to prospectively treat the class or classes of workers as employees for future tax periods. The taxpayer need not agree to extend the period of limitations on assessment of employment taxes as part of the VCSP closing agreement. In exchange, the taxpayer: • will pay 10% of the employment tax liability that would otherwise have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of Internal Revenue Code section 3509(a); • will not be liable for any interest and penalties on the amount; and • will not be subject to an employment tax audit with respect to the previous classification of the workers being reclassified under the VCSP.

§ 3 WORKER STATUS UNDER SPECIFIC EMPLOYMENT & LABOR LAWS § 3.1 WAGE & HOUR CONSIDERATIONS The FLSA was enacted to protect employees from substandard wages and excessive hours.131 FLSA minimum wage, overtime, equal pay and child labor protections apply to employees who are engaged in interstate commerce, in the production of goods for commerce or employed by an enterprise engaged in interstate commerce.132 Employees of private sector employers, state and local

131 132

29 U.S.C. §§ 201 et seq. 29 U.S.C. §§ 206, 207, 212.

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government, and most federal agencies are covered.133

§ 3.1(a) Test for Employee/Independent Contractor Status Under the FLSA The protections of the FLSA apply only to employees, but the FLSA defines the term broadly.134 An employee is defined as any individual employed by an employer. The FLSA defines the verb employ expansively, to mean “to suffer or permit to work.” The U.S. Supreme Court held in Rutherford Food Corp. v. McComb that the traditional common law criteria were not broad enough to determine whether a worker was an independent contractor or a protected employee for FLSA purposes.135 Rather, the court held that a more appropriate test would include an examination of the underlying “economic realities” of the work relationship.136 Nonetheless, a primary consideration in determining whether a worker’s status for purposes of the FLSA remains whether the engaging entity has the right to control how the work is to be performed by the worker. A determination of a worker’s status cannot be based on isolated factors or a single characteristic but, as stated in Rutherford Food Corp., must take into account “the circumstances of the whole activity.”137 The presence and degree of any one factor is a question of fact, “while the legal conclusion to be drawn from those factors—whether workers are employees or independent contractors—is a question of law.”138 Because independent contractor classification cases are fact-specific by nature, it is difficult to glean a universal rule from any one decision. By way of example: • Security officers of housing project were independent contractors, despite limited opportunity for profit and loss, where little control was exercised and provision of security was not an integral function of housing authority.139 However, security guards who performed work in accordance with the defendant’s rules were employees rather than independent contractors, even though the guards had signed independent contractor contracts.140 • A cable splicer from Delaware who worked in New Orleans repairing Hurricane Katrina’s damage to a telecommunications company’s telephone system was found to be an 133

29 U.S.C. § 203. 29 U.S.C. § 203(e), (g). 135 331 U.S. 722 (1947). 136 Rutherford Food Corp., 331 U.S. at 727. This test is important because “the fact that the parties … may have entered into a relationship which appeared on paper to be that between a business and an independent contractor is not dispositive of the issue of whether [the] [p]laintiff was, in reality, an employee as opposed to an independent contractor for FLSA purposes.” Padjuran v. Aventura, 500 F. Supp. 2d 1359, 1362 (S.D. Fla. 2007). 137 See, e.g., U.S. DEP’T OF LABOR, FIELD OPERATIONS HANDBOOK ch. 10, § 10b05-10b09 (1993), available at http://www.dol.gov/whd/FOH. 138 Norwest Fin., Inc. v. Fernandez, 2000 U.S. App. LEXIS 23466, at *7 (2d Cir. Sept, 14, 2000) (quoting Brock v. Superior Care, Inc., 840 F.2d 1054, 1059 (2d Cir. 1988)). 139 Johnson v. Wyandotte County Unified Gov’t, 371 F.3d 723 (10th Cir. 2004). 140 Solis v. Int’l Detective & Protective Serv., Ltd., 819 F. Supp. 2d 740 (N.D. Ill. 2011) (concluding that security guards who performed work in accordance with the defendant’s rules were employees rather than independent contractors, even though the guards had signed independent contractor contracts). 134

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independent contractor where: the cable splicer did not work exclusively for the telecommunications company; the only supervision provided by the company was to tell the cable splicer what needed to be spliced; the job required a specialized skill; the cable splicer provided the majority of his own equipment; and the splicer’s livelihood depended on his ability to consistently find splicing work with other companies.141

§ 3.1(b) Payment of Part-Time Employees The FLSA requires an employer to keep accurate records of the hours worked by an employee and pay minimum wage as well as any applicable overtime. Employers of part-time employees must consider whether wage thresholds for various purposes under the FLSA are cumulative for employees working for more than one employer in a relevant period. For example, the FLSA sets the minimum pay an employee must earn before an employer may enforce a garnishment order against that individual’s wages. However, what happens when an employee works for two employers on a part-time basis during a relevant period? If that employee’s wages from each employer are insufficient to meet this threshold, but the combined wages from both employers meet the threshold, can either employer garnish the employee’s wages? The answer is no.142 However, different rules may apply to different wage thresholds, and employers should take care to follow the appropriate rules.

§ 3.2 EMPLOYEE BENEFITS CONSIDERATIONS § 3.2(a) Eligibility for Employee Benefit Plans With few exceptions, employee benefit plans must cover only employees of the company sponsoring the plan. Some workers are per se ineligible (because they are not deemed employees of the company sponsoring the plan). Those who otherwise qualify as employees may be ineligible because the employer has excluded them from coverage. Note that third-party employment situations complicate determining eligible/responsible parties.

§ 3.2(a)(i) Ineligible Workers The following are categories of workers ineligible for benefit plans because they are deemed not to be an “employee:” • self-employed independent contractors who contract with the company sponsoring the plan to provide services; • workers who contract with a Firm sponsoring the plan, such as a leasing firm, and provide services and qualify as an employee of the Client Company, but not the Firm; and • workers who contract with a Firm to provide services for the Client Company (here, the company sponsoring the plan) and do not qualify as an employee of the Client Company.

§ 3.2(a)(ii) Excluded Employees Employers may also exclude certain categories of employees from eligibility for benefits— e.g., benefits offered only to full-time employees as opposed to temporary or part-time employees—

141 142

Thibault v. BellSouth Telcoms., Inc., 612 F.3d 843 (5th Cir. 2010). U.S. Dep’t of Labor, Wage & Hour Div., Op. Ltr. WH-110 (1971).

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as long as the exclusion is not arbitrary or based on impermissible criteria.143 Any exclusions must be carefully considered. The company sponsoring a plan should first consult with legal counsel to ensure that it is permissible to exclude certain groups of employees or workers from any selected benefit plan. For example, the court in Wolf v. Coca-Cola Co. held that an eligibility criterion that excludes “individuals who perform services for the company under an agreement with a leasing organization” was sufficient for purposes of excluding leased employees from an ERISA plan.144 However, new mandates under the ACA and 401k plan nondiscrimination testing rules complicate overbroad exclusions.

§ 3.2(a)(iii) Consequence of Allowing Independent Contractors to Participate in a Plan or Over-Exclusion The consequences of mistakenly allowing an independent contractor to participate in an employee benefit plan or of over-exclusion of workers under the various statutes can be draconian.145 For example, with respect to a qualified retirement plan, the consequences may include: • immediate liability to plan participants (i.e., employees) for income taxes on the amount of their vested benefits under the plan; • liability to plan participants for employment taxes on amounts received; • potential liability for penalties and interest; and • a breach of fiduciary duty under ERISA, which requires that all plan assets be held for the exclusive purpose of benefiting employees and their beneficiaries.

§ 3.2(a)(iv) Health Benefit Plans & Multiple Employer Welfare Arrangements Regarding health benefit plans, if the company sponsoring the plan does not qualify as the common law employer of workers participating in its health benefit plan, the plan could be deemed a multiple employer welfare arrangement (MEWA). Many states subject MEWAs to significant regulation, particularly if the MEWA is self-insured. These regulations are similar to, but generally less financially demanding than, state insurance regulations. In addition, a MEWA that is not self-insured but provides coverage through health insurance could be treated as engaged in the unlicensed sale of insurance. For a more detailed analysis of rules applicable to employee benefit plans, see LITTLER ON EMPLOYEE BENEFITS: HEALTH & WELFARE PLANS.

143

Bronk v. Mountain States Tel. & Tel., 140 F.3d 1335, 1338 (10th Cir. 1998) (“an employer need not include in its pension plans all employees who meet the test of common-law employees”), on remand, 216 F.3d 1086, 1089 (10th Cir. 2000) (“plaintiffs were not entitled to participate in either the welfare plans or the pension plans”); Clark v. E.I. DuPont de Nemours & Co., 105 F.3d 646, 651 (4th Cir. 1997). 144 200 F.3d 1337, 1342 (11th Cir. 2000); see also Law v. Northwest Natural Gas Co., 2007 U.S. Dist. LEXIS 32973 (D. Or. May 2, 2007) (holding that it did not matter if the workers were considered common law employees since they were ineligible for benefits under the language of the employer’s pension plan). 145 Professional & Exec. Leasing, Inc. v. Commissioner IRS, 862 F.2d 751, 753 (9th Cir. 1988) (because employer did not exercise sufficient control over certain employees it leased to other businesses, no employment relationship was established, thus, employer’s retirement plans did not qualify under IRC § 401 as being exclusively for benefit of employees).

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§ 3.2(b) Test for Employee/Independent Contractor Status Under ERISA In Nationwide Mutual Insurance Co. v. Darden, the U.S. Supreme Court distinguished the FLSA’s expansive definition of employee from the definition provided in the Employee Retirement Income Security Act (ERISA), which is any individual employed by an employer.146 To determine independent contractor status for ERISA purposes, courts apply a common law agency test: • the right to control the manner and means by which the project is accomplished; • the skill required; • the source of the instrumentalities and tools; • the location of the work; • the duration of the relationship between the parties; • whether the hiring party has the right to assign additional projects to the hired party; • the extent of the hired party’s discretion over when and how long to work; • the method of payment; • the hired party’s role in hiring and paying assistants; • whether the work is part of the regular business of the hiring party; • whether the hiring party is in business; • the provision of employee benefits; and • the tax treatment of the hired party.147

§ 3.2(c) Issues of Misclassification & Third-Party Firms Under ERISA Section 510 Section 510 is significant to contingent worker arrangements because a Client Company could be vulnerable to a claim by its contingent workers if the benefit programs offered by the Firm are less generous than the benefits the workers would receive through the Client Company. To minimize the risk of liability under ERISA section 510, Client Companies should carefully document the business reasons for utilizing contingent workers and regularly audit for benefit plan potential liabilities.

§ 3.2(d) “Leased Employees” Under Internal Revenue Code Section 414(n) Another dimension to the employee benefit implications of contingent workers is provided by Internal Revenue Code section 414(n), which states that “Leased Employees,” for purposes of certain employee benefit provisions, shall be treated as employees of the “Recipient Company” (i.e., the company receiving the services of the Leased Employee). (To avoid confusion, “Leased Employees” specifically refers to those as defined in section 414(n); “leased employees” refers to the general 146 147

503 U.S. 318 (1992). 503 U.S. at 323-24 (quoting Community for Creative Non-Violence v. Reid, 490 U.S. 730, 751–52 (1989)).

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broader term.) Section 414(n) defines a Leased Employee as any person who is not an employee of the Recipient Company and who provides services to the Recipient Company if: (1) the services are provided pursuant to an agreement between the Recipient Company and a leasing organization; (2) such services are performed “on a substantially full-time basis” for a period of at least one year; and (3) are performed under the primary direction or control of the Recipient Company.148 This definition includes an oral agreement for such services. An individual has performed services “on a substantially full-time basis” if the individual has performed: (1) at least 1,500 hours of service for the Recipient Company during any consecutive 12-month period; or (2) a number of hours at least equal to 75% of the time customarily performed by an employee of the Recipient Company in the particular position. According to section 414(n)’s relevant legislative history, factors considered in determining whether services are performed under the primary direction and control of the Recipient Company include whether: • the individual is required to comply with instructions of the service Recipient Company about when, where and how he or she is to perform the services; • the services must be performed by a particular person; • the individual is subject to the supervision of the Recipient Company; and • the individual must perform services in the order or sequence set by the Recipient Company. A plan maintained by a Recipient Company may exclude “all Leased Employees under section 414(n),” subject to certain requirements.149 All leased employees are treated as “employees” of the Recipient Company for purposes of applying certain tax requirements. One such requirement that applies only to qualified retirement plans is that the plan benefits at least 70% of the plan-sponsoring company’s non-highly-compensated employees.150 A business using leased employees should keep these rules in mind when excluding workers who qualify as “leased employees” so that favorable tax treatment of the plan is preserved. The definition of a Leased Employee in section 414(n) is very specific and narrower than the definition of the term as understood in more colloquial terms (i.e., workers engaged by a Client Company through a leasing firm). For example, one case involved a qualified retirement plan that excluded the participation of certain workers by referencing them as “Leased Employees under section 414(n).”151 The court held that it was an insufficient basis for exclusion. It remains fairly common, however, to see exclusions in plans refer to section 414(n) even though employers may be excluding a far broader class of individuals in actual practice. Accordingly, to avoid any doubt, when 148

26 U.D.C. § 414(n)(2). Bauer v. Summit Bancorp, 325 F.3d 15 (3d Cir. 2003); Wolf v. Coca-Cola, 200 F.3d 1337 (11th Cir. 2000); Bronk v. Mountain States Tel. & Tel., 140 F.3d 1335 (10th Cir. 1998). 150 26 U.S.C. § 410(b). 151 Burrey v. Pacific Gas & Elec. Co., 159 F.3d 388 (9th Cir. 1998). While the court in Burrey ultimately held that the workers at issue were not eligible to participate in the plan, the decision was obtained only after protracted litigation and was based upon a determination that the workers did not qualify as common law employees of the sponsoring employer.

149

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the employer’s intent is to exclude “leased employees” in general terms, a preferred plan provision is to exclude all workers who perform services for the sponsoring employer pursuant to a contract with, and who are paid by, a third party.

§ 3.2(e) Employment Status & COBRA Rights Employees going from full-time employment to part-time employment (or to independent contractor status) may be entitled to COBRA continuation coverage due to the fact that their reduction in work hours no longer qualifies them for employer-provided medical benefits.152 An event that causes a qualified beneficiary (employee, spouse or dependent child) to lose medical coverage under the employer’s plan is considered a qualifying event under COBRA. A voluntary termination of employment or reduction of hours remains a qualifying event. With the exception of gross misconduct, the circumstances connected with the termination of employment or reduction in working hours, are irrelevant. Coverage cannot be reduced or eliminated in anticipation of a qualifying event. If it is, this change is disregarded in deciding whether the event causes a loss of coverage. For a more in-depth discussion of COBRA obligations, see LITTLER ON EMPLOYEE BENEFITS: HEALTH & WELFARE PLANS.

§ 3.2(f) Patient Protection and Affordable Care Act “Safe Harbor” The implementation of the 2010 Patient Protection and Affordable Care Act (ACA) has created confusion as to how the employer mandate— which requires employers to provide health coverage that meets certain standards or pay a fee applies to a contingent workforce arrangement. This task is complicated by the fact that numerous staffing operational models exist and the IRS Final Rule153 implementing the employer mandate is confusing in its definitions of staffing relationships. As an initial point, Firms having contractual and exclusive responsibility for temporary worker benefits has long been a cornerstone of the value proposition for most staffing relationships. The ACA’s employer mandate is imposed on the common law employer of the employee regardless of the content of the contingent workforce agreement. The IRS Final Rule defines the term employee as an individual who is an employee under the common law control standard under Treasury Regulation section 31.3401(c)-1(b). Although the Final Rule does not include much further discussion of the common law test, the preamble to the proposed rule described the common law test as follows: Under the common law standard, an employment relationship exists when the person for whom the services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. Under the common law standard, an employment relationship exists if an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if the employer has the right to do so.154 152 153 154

26 U.S.C. § 4980B(f)(3)(B). 79 Fed. Reg. 8544 (Feb. 12, 2014). 79 Fed. Reg. 8544, preamble (Feb. 12, 2014).

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The IRS Final Rule also includes a provision describing circumstances in which an offer of coverage on behalf of another entity will be treated as made by the employer for purposes of the ACA. This has been described by some as a “safe harbor,” although it does not allow a party to escape liability for failing to meet the employer mandate. This provision states that an offer of coverage made to an employee on behalf of a contributing employer under a Taft-Hartley plan or multiple employer welfare arrangement (MEWA) will be treated as an offer of coverage made by an employer. In addition, where the Firm is not the common law employer of the worker performing services for a Client Company and yet the Firm offers health coverage on behalf of the Client Company, the offer is treated as made by the Client Company provided the Client Company pays the Firm a fee for an employee enrolled in the Firm’s health plan that is higher than the fee charged by the Firm if the worker had not elected coverage (ACA “safe harbor premium fee”). This safe harbor premium fee has proven to be point of contention for some staffing firms, which insist the probability of the Client Company being deemed the common law employer are remote, and continue to insist on “across the board” ACA pricing models rather than allowing for individual worker premium pricing dependent on ACA elections. The amount of control exercised over the day-to-day work of the contingent workers is ultimately determinative and it is unclear if this will be an enforcement priority of the IRS, especially if the Firm has offered all the workers ACA qualifying coverage. Nonetheless, as noted above, the ACA penalties can be draconian. If it is added to the contract, this enhanced fee requirement should be clearly spelled out in all contingent workforce agreements.

§ 3.3 WORKPLACE SAFETY CONSIDERATIONS § 3.3(a) Employee/Independent Contractor Status Under Fed-OSH Act The federal Occupational Safety and Health Act (“Fed-OSH Act”) defines employee as an employee of an employer that is employed in a business that affects commerce.155 An independent contractor may be reclassified as an employee based upon the following factors: • Whom do the workers consider their employer? • Who pays the workers’ wages? • Who has responsibility to control the workers? • Does the alleged employer have the power to control the workers? • Does the alleged employer have the power to fire or hire the workers or modify the workers’ employment conditions? • Does the workers’ ability to increase their income depend on efficiency rather than initiative, judgment and foresight? • How are the workers’ wages established?156

155 156

29 U.S.C. § 652(6). Secretary v. Griffin & Brand of McAllen, Inc., 6 O.S.H. Cas. (BNA) 1702 (1978).

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§ 3.3(b) Fed-OSH Act Protections & the Use of Third-Party Firms A body of case law exists to identify the proper employer for Fed-OSH Act purposes in the context of a loaned employee. This context may prove analogous to the leased-employee situation. In these cases, loaning organizations seek to disclaim liability under the Fed-OSH Act by shifting responsibility to the borrowing companies through different contractual arrangements. The Occupational Safety and Health Review Commission (OSHRC) has stated that even where a borrowing company has agreed to accept responsibility, “an employer remains accountable for the health and safety of its employees, wherever they work, and cannot divest itself of its obligations under the Act by contracting its responsibility to another employer.”157 It is therefore unlikely that a leasing agreement can free a Client Company from ultimate Fed-OSH Act responsibility for leased employees if the Client Company qualifies as the employer of affected workers for purposes of the Fed-OSH Act statute.

§ 3.3(c) Fed-OSHA’s Temporary Worker Initiative In 2013, the Occupational Safety and Health Administration (“Fed-OSHA”) launched the Temporary Worker Initiative (TWI) to “increase [the agency’s] focus on temporary workers” and “highlight employers’ responsibilities to ensure these workers are protected from workplace hazards.”158 In fiscal year 2014, OSHA conducted 944 inspections involving temporary employees exposed to hazards, 626 of which resulted in citations, with proposed penalties of over $11.8 million.159 Also, this initiative led to a 322% increase in Fed-OSHA inspections involving staffing agencies in fiscal year 2014.160 In July 2014, Fed-OSHA sent a “reminder” memorandum to Regional Administrators, noting that for purposes of the TWI program: “temporary workers” are workers hired and paid by a staffing agency and supplied to a host employer to perform work on a temporary basis. In general, OSHA will consider the staffing agency and host employer to be “joint employers” of the worker in this situation.161 As evidenced by this memorandum, Fed-OSHA intends to extend responsibility for safety issues to all employers in multi-employer arrangements. Third-party firms, including staffing agencies and PEOs, should take this memorandum into consideration when evaluating potential liability under the Fed-OSH Act.162 157

Secretary v. Acchione & Canuso, Inc., 7 O.S.H. Cas. (BNA) 2128 (1980). U.S. Dep’t of Labor, OSHA, Policy Background on the Temporary Worker Initiative (July 15, 2014), available at https://www.osha.gov/temp_workers/Policy_Background_on_the_Temporary_Worker_Initiative.html. 159 Kevin G. Kilp, OSHA Area Director, Temporary Worker Safety and OSHA’s Temporary Worker Initiative (Oct. 28, 2014). 160 Roy Maurer, Temporary Worker Safety Inspections Up 322 Percent, SHRM (Dec. 19, 2014), available at http://www.shrm.org/hrdisciplines/safetysecurity/articles/pages/temporary-worker-safety-inspections.aspx. 161 U.S. Dep’t of Labor, OSHA, Policy Background on the Temporary Worker Initiative (July 15, 2014). 162 Effective August 2, 2016, OSHA penalty amounts were increased for the first time since 1990. Going forward, they will be adjusted each year for inflation based on the Consumer Price Index. For current penalty amounts see https://www.osha.gov/penalties/. OSHA's penalty policy, including minimums, maximums and factors considered when assessing the penalty, can be found in Chapter Six of OSHA's Field Operations Manual, located at 158

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While the extent of responsibility under the law of staffing agencies and employers is dependent on the specific facts of each case, it is OSHA's position that staffing agencies and employers are jointly responsible for maintaining a safe work environment for temporary workers—including, for example, ensuring that OSHA's training, hazard communication, and recordkeeping requirements are fulfilled. According to OSHA, temporary staffing agencies and employers share control over the worker and are therefore jointly responsible for temporary workers' safety and health.163

§ 3.4 EMPLOYMENT DISCRIMINATION, HARASSMENT & RETALIATION CONSIDERATIONS § 3.4(a) Coverage Thresholds & Test for Employee/Independent Contractor Status Title VII of the Civil Rights Act of 1964 (“Title VII”) and the Americans with Disabilities Act (ADA) define an employer as “a person engaged in an industry affecting commerce who has 15 or more employees for each working day in each of 20 or more calendar weeks in the current or preceding calendar year.”164 The same definition applies under the Age Discrimination in Employment Act (ADEA), but the threshold number is 20 employees.165 Notably, many state laws that provide protections similar to the federal laws have various lower thresholds, even as low as one employee. In Walters v. Metropolitan Educational Enterprises, the U.S. Supreme Court held that the payroll method was the proper method to determine whether an employer has a sufficient number of 166 employees to be covered by Title VII. The Court found the necessary employment relationship exists when the employer employs 15 or more employees during each payroll period in 20 or more weeks during the year in question. The Court believed that such an employment relationship was most readily demonstrated by the employees’ appearance on the employer’s payroll whether or not they worked on a specific day during the payroll period. As a general rule, once the statutory minimums are met and an employer is covered by the antidiscrimination statutes, all employees are entitled to the protections of these statutes. As such, part-time employees will be covered.167 However, Title VII protections do not generally extend to independent contractors.168 The general exclusion of independent contractors from antidiscrimination protections has a few exceptions. The Rehabilitation Act of 1973,169 which covers individuals with disabilities “subjected to discrimination under any program or activity receiving Federal financial assistance,” has been applied to independent contractors. 170 Specifically, the Ninth Circuit Court of https://www.osha.gov/OshDoc/Directive_pdf/CPL_02-00-160.pdf. 163 U.S. Dep't of Labor, OSHA, Protecting Temporary Workers, available at https://www.osha.gov/temp_workers/index.html. 164 42 U.S.C. § 2000e(b). 165 29 U.S.C. § 630(b). 166 519 U.S. 202 (1997). 167 Graves v. Women’s Professional Rodeo Assn., 708 F. Supp. 233 (W.D. Ark. 1989), aff’d, 907 F.2d 71 (8th Cir. 1990). 168 Alam v. Miller Brewing Co., 709 F.3d 662, 667–668 (7th Cir. 2013); Taylor v. ADS, Inc., 327 F.3d 579, 581 (7th Cir. 2003). 169 29 U.S.C. §§ 701 et seq. 170 29 U.S.C. § 794(a). © 2016 LITTLER MENDELSON, P.C. ALL RIGHTS RESERVED.

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Appeals has held that independent contractors are covered under the Rehabilitation Act because the statute’s language is broader than under the ADA.171 However, the Sixth and Eighth Circuits have not reached the same conclusion.172 Independent contractors may also be protected from alleged race discrimination in contractual relationships under section 1981 of the Civil Rights Act of 1866, whose substantive elements are “generally identical to the elements of an employment discrimination claim under Title VII.”173 Section 1981 provides that “all persons … shall have the same right … to make and enforce contracts … as is enjoyed by white citizens.”174 Several appellate courts have held that an independent contractor may bring a discrimination claim under “section 1981 for discrimination occurring within the scope of the independent contractor relationship.”175 There is continuing inconsistency among the federal courts of appeals regarding whether they should apply the common law control or “hybrid” test (common law test augmented by the “economic realities” test) to determine whether a worker is an employee under the federal antidiscrimination laws, even though the Supreme Court has arguably made clear that the federal antidiscrimination laws are to be interpreted using the common law control test.176 The Fourth Circuit recently applied the hybrid test in reversing a summary judgment order that previously dismissed a Client Company from a sex harassment Title VII lawsuit brought against it by a temporary worker.177

§ 3.4(b) Antidiscrimination Protections & the Use of Third-Party Firms Workers paid as employees rather than independent contractors by the contingent worker Firm are, of course, afforded the protections of the antidiscrimination laws and may hold either the staffing firm (or PEO), the Client Company, or both, liable under a theory of joint employment. Specifically, Title VII, the ADEA, the ADA and the Equal Pay Act (EPA) apply to individuals who are hired by temporary employment agencies, contract firms and other staffing firms, but whose working conditions are controlled in whole or in part by the businesses to which they are assigned.178 PEOs by contrast have had more success in avoiding joint employer theories under these statutes. For example, in Hunt v. State of Missouri, Department of Corrections, the Client Company was determined to be the Title VII employer along with the staffing company.179 The court utilized the hybrid test (common law and economic realities tests) to find that temporary workers were employees because the client oversaw recruitment, provided the workplace and all equipment, established all procedures, approved time cards, constantly supervised the workers and financed all compensation. In contrast, these same workers may not have been deemed “joint employees” for tax purposes. 171

Fleming v. Yuma Reg’l Med. Ctr., 587 F.3d 938 (9th Cir. 2009). See Wojewski v. Rapid City Reg’l Hosp., Inc., 450 F.3d 338, 345 (8th Cir. 2006) (holding the Rehabilitation Act does not apply to independent contractors); Hiler v. Brown, 177 F.3d 542, 545 n.5 (6th Cir. 1999) (noting that the “ADA, ADEA, and the Rehabilitation Act borrowed the definition of ‘employer’ from Title VII”). 173 Brown v. J. Kaz, Inc., 581 F.3d 175, 181–82 (3d Cir. 2009). 174 42 U.S.C. § 1981(a). 175 Brown, 581 F.3d 175; see also Webster v. Fulton County, 283 F.3d 1254, 1257 (11th Cir. 2002). 176 Clackamas Gastroenterology Assocs., P.C. v. Wells, 538 U.S. 440 (2003) (applying the common law agency test to determine the existence of an employment relationship under the ADA). 177 Butler v. Drive Automotive Indus. of Am., Inc., 793 F.3d 404 (4th Cir. 2015). 178 EEOC, Enforcement Guidance: Application of EEO Laws to Contingent Workers Placed by Temporary Employment Agencies and Other Staffing Firms (Dec. 3, 1997) , available at http://www.eeoc.gov/policy/docs/conting.html. 179 297 F.3d 735 (8th Cir. 2002). 172

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According to the federal Equal Employment Opportunity Commission (EEOC), in its general Enforcement Guidance on contingent workers, when a Firm knows or suspects that one of its employees has suffered discrimination at the hands of a client, it must take corrective measures that include, but are not limited to: • ensuring that the Client Company is aware of the alleged misconduct; • asserting the Firm’s commitment to protect its workers from unlawful harassment and other forms of prohibited discrimination; • insisting that prompt investigative and corrective measures be undertaken; • affording the worker the opportunity, if he or she so desires, to take a different job assignment at the same or a higher rate of pay; and • refraining from assigning additional workers to that work site unless the Client Company has undertaken the necessary corrective and preventive measures to ensure that the discrimination will not recur.180 These administrative duties make the Firm a type of “conscience of the client” or deputy of the EEOC for the purposes of discrimination law enforcement. While most of these requirements make good policy sense for Firms and would help them avoid liability exposures, the statutory or regulatory basis of the EEOC’s authority to impose them is not readily apparent. The EEOC Enforcement Guidance adopts an approach regarding allocating contingent workplace discrimination liability that can fairly be summarized as: “Who knew what, who controlled what and what did each of them do about it?” This approach was based on older court cases and administrative holdings that had followed similar principles.181 This approach, used by courts and the EEOC, has not significantly changed since the issuance of the Enforcement Guidance by the EEOC or in the courts; however, because it is very dependent on the facts of each situation, the results have been irregular and perhaps even inconsistent, making it difficult to predict how liability for discrimination will be apportioned in any new situation.182

§ 3.4(b)(i) Antidiscrimination Liabilities Beyond the Traditional Employee Relationship A decision that illustrates how antidiscrimination liabilities might extend beyond the traditional employer-employee relationship is Moland v. Bil-Mar Foods.183 Moland involved a plaintiff who was 180

EEOC, Enforcement Guidance: Application of EEO Laws to Contingent Workers Placed By Temporary Help Agencies and Other Staffing Firms, Question 8 (Dec. 3, 1997), available at http://www.eeoc.gov/policy/docs/conting.html. 181 See, e.g., Caldwell v. Servicemaster Corp., 966 F. Supp. 33 (D.D.C. 1997) (a temporary agency is liable for discrimination against temporary worker by client if agency knew or should have known of the discrimination and failed to take corrective measures within its control); Magnuson v. Peak Tech. Servs., 808 F. Supp. 500, 511–14 (E.D. Va. 1992) (staffing firm and automobile company liable for sexual harassment by nonemployees because of their actual or constructive knowledge of the harassment and their failure to take corrective action within their control). 182 Cf. Dunn v. Uniroyal Chemical Co., 192 F. Supp. 2d 557 (M.D. La. 2001) (finding that the client had no liability because it had less than complete control over employee and thus had no employment relationship with the employee), with Blagg v. Tech. Group, Inc., 303 F. Supp. 2d 1181 (D. Colo. 2004) (finding that the clients controlled the workers and therefore had an employment relationship with them, while the staffing firms supplying the workers had no such relationship). 183 994 F. Supp. 1061 (N.D. Iowa 1998).

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employed by a meat packing company and asserted a Title VII claim against a different company for sexual harassment and unlawful retaliation for reporting the sexual harassment. In concept, the federal district court in Moland held that an employee of Company X can bring a Title VII action against Company Y, even though Y is not his or her employer, if Y’s discriminatory conduct interferes with his or her employment with Company X. Framing the issue in those precise terms, the court held that the plaintiff stated valid Title VII claims against the defendant company for sexual harassment and unlawful retaliation for reporting an alleged sexual harassment, based on a finding that the named defendant’s actionable conduct interfered with the plaintiff’s employment with the meat packing company. An even broader application of Title VII occurred in Kudatzky v. Galbreath Co.184 In this case, the court held that an employer can be liable under Title VII for the sexual harassment of its employee, even though: (1) the harasser was a nonemployee (e.g., an independent contractor); and (2) the harassment took place at a client’s location. Although the plaintiff in Galbreath was employed by the defendant, all of her services were performed at a client’s office building that she managed. The plaintiff claimed she was repeatedly sexually harassed by an employee of the client who owned the office building. The plaintiff sued the defendant, claiming it violated Title VII by failing to protect her against a hostile environment. The court reasoned that despite the fact that the allegedly offensive conduct took place outside of the defendant’s corporate offices and on the premises of a client, Title VII is designed to protect employees against sexual harassment in the workplace—irrespective of whether an employee’s workplace is on the premises of the employer or at a different location. Inasmuch as the plaintiff in Galbreath, by the nature of her job, was required to work at a client location, the court determined it would defeat the purpose of Title VII to absolve the defendant of any liability simply because the plaintiff’s workplace is at a location other than premises owned by the defendant. The Galbreath decision suggests that for purposes of Title VII, a company that engages independent contractors to perform services under circumstances where the contractors interact with the company’s own employees, the company could be liable to its employees under Title VII for sexual harassment committed by the contractors.185

§ 3.4(b)(ii) Indemnification Provisions & the Use of Third-Party Firms When a contingent worker files an administrative charge or litigation, strategic and tactical issues arise between the Firm providing the worker and its Client Company. The employee may file against both businesses or may file against just one of them. The EEOC and other federal agencies almost always issue dual companion charges against both the Firm and the Client Company. Even if the Client Company is not directly subject to a particular employment law (e.g., because of its size it may 184

1997 U.S. Dist. LEXIS 14445 (S.D.N.Y. Sept. 23, 1997). See also Nardi v. ALG Worldwide Logistics, 130 F. Supp. 3d 1238 (N.D. Ill. 2015) (granting motion for summary judgment in favor of a PEO under the hybrid joint employer test holding the PEO was not the plaintiff’s employer for the purposes of a Title VII sex harassment claim); Butler v. Drive Automotive Indus. of Am., Inc., 793 F.3d 404 (4th Cir. 2015) (reversing summary judgment under the hybrid joint employer legal test granted to the client of a staffing firm on a Title VII sex harassment case, finding it was a question of fact for the jury whether the client was a joint employer and controlled the plaintiff’s work environment); Halpert v. Manhattan Apartments Inc., 580 F.3d 86 (2d Cir. 2009) (employers may be held liable under the ADEA for discrimination by independent contractors if the employer authorizes them to make hiring decisions on its behalf); Velez v. Roche, 335 F. Supp. 2d 1022 (N.D. Cal. 2004) (holding that the plaintiff could assert a claim for hostile work environment against an indirect employer when the indirect employer caused the hostile work environment or when it had the power to stop the hostile work environment such that its failure to do so constituted interference with the terms, conditions or privileges of the plaintiff’s direct employment). 185

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not be covered by Title VII), it may still be affected by administrative charges or litigation brought against the third-party firm under that law. If the third-party firm is subject to viable employment law claims by contingent workers, the Client Company may be subject to discovery related to those claims, to scrutiny by agencies that have other kinds of jurisdiction over it and to potential ultimate financial liability for the claims through contractual indemnification agreements with the third-party firm. A Firm or Client Company that believes it is blameless sometimes wishes to deflect blame toward the other or may try to expand the charge or suit to include the other if the employee did not initially involve both entities. In the long run, however, for a number of reasons, it is usually best for the two entities to be as carefully cooperative and united in the defense of the claim as they can be for as long as possible. Sometimes either the Firm or Client Company will anticipate asserting indemnity rights against the other entity and will privately insist at the outset of the claim that the other pledge to cover all of the ongoing and eventual costs and liabilities accruing to both entities from the matter. Often, however, it is too early for anyone to determine the facts, to predict its outcome or to assess the criteria that are used by most indemnity clauses to affix liability—such as negligence, gross negligence, willful misconduct, conformity with the staffing contract and violation of law.

§ 3.5 WORKERS’ COMPENSATION & UNEMPLOYMENT CONSIDERATIONS § 3.5(a) Workers’ Compensation & the Use of Third-Party Firms All states, except Texas, require employers to maintain workers’ compensation insurance for their employees. When a third-party firm is involved, which entity—the Firm or the Client Company—is responsible for obtaining this insurance? State law controls the answer to this question with sometimes opposite results. For example:

186 187 188 189

California: Effective January 1, 2015, a Client Company shares legal responsibility and liability for all workers supplied by a Firm for the failure to secure valid workers’ compensation coverage.186

New York: A Client Company must obtain workers’ compensation insurance covering all its workers, regardless of whether they are its employees. In addition, a leasing firm/PEO must either obtain insurance covering all workers for whom it is considered a common law employer or obtain an endorsement on the Client Company’s policy.187

Massachusetts: The opposite is true (i.e., the Firm must obtain insurance naming the Client Company as an insured).188

New Jersey: Also requires the Firm to maintain and provide workers’ compensation insurance to covered employees.189

CAL. LAB. CODE § 2810.3 (added by CAL. A.B. 1897 (Sept. 28, 2014)). N.Y. WORKERS’ COMP. LAW § 2.3; N.Y. LAB. LAW § 922.3-922.4. 211 MASS. CODE REGS. 111.04. N.J. STAT. § 34:8.

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In most states where Firms are regulated by statute, the Firms may obtain workers’ compensation insurance but must maintain segregated accounts for each client (e.g., Ohio, Oregon, North Carolina, Tennessee and Washington). Most workers’ compensation policies will also allow for “alternative employer” endorsements to allow for coverage of both the Client Companies and the applicable Firm. In Georgia and Rhode Island, only the PEO needs to provide insurance but the insurance must cover both the PEO and its clients.190 It is important to first properly classify a worker under a state’s workers’ compensation laws, as demonstrated in Awuah v. Coverall.191 In that case, the Supreme Judicial Court of Massachusetts reiterated the Commonwealth’s mandate that it is the sole responsibility of the employer to provide worker’s compensation insurance to cover its employees.192 Should the employer misclassify an employee as an independent contractor and charge the worker for workers’ compensation premiums, that worker may recover as “damages incurred” any such premiums that the he or she was obliged to pay.193 Notably, a Client Company seeking to avoid employer responsibilities for workers’ compensation premiums and benefits by using contingent workers should be aware that by doing so they also risk losing the benefits of the “exclusive” remedy of workers’ compensation systems. In most states, the workers’ compensation remedy is the exclusive form of relief available against the employer for workplace injuries. Companies seeking to avoid workers’ compensation liabilities also risk losing this valuable defense. Particularly if the Client Company owns and maintains the workplace, the potential liability can be substantial if a leased employee is injured. To avoid any penalties or liability for mistakenly failing to obtain workers’ compensation insurance, legal counsel should be consulted to determine the workers’ compensation requirements under the law of the particular state in question.194

§ 3.5(b) Unemployment Insurance Laws & the Use of Third-Party Firms Employers are required to pay to the state an unemployment insurance tax for all wages the employer pays to covered employees. When a third-party firm is involved and the parties allocate payroll responsibilities to the Firm, the Firm is the party most likely to be responsible for remitting such payments. If the Firm fails to make these payments, however, the Client Company would be secondarily liable as a co-employer. State laws vary with respect to whether unemployment insurance contributions must be made under the Firm’s or the Client Company’s registration number. To avoid any penalties for failing to pay unemployment insurance tax, Firms and Client Companies alike are advised to seek legal counsel to determine which entity is obligated to pay unemployment insurance tax under a particular state’s law. Similarly, the client service agreements should clearly identify which company is responsible for collecting and remitting the taxes.

190

GA. CODE ANN. § 34911(c); R.I. GEN. LAWS § 28292. Awuah v. Coverall N. Am., Inc., 952 N.E.2d 890 (Mass. 2011). 192 952 N.E.2d 890. 193 952 N.E.2d 890. 194 Several states have passed legislation aimed at punishing employers who misclassify workers, either “improperly” and “knowingly,” as independent contractors to avoid paying workers’ compensation premiums and unemployment insurance. See, e.g., Misclassification of Employees as Independent Contractors Act, H.B. 09-1310 (Colo. 2009); Workplace Fraud Act, H.B. 230, 145th Gen. Assem. (Del. 2009).

191

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§ 3.6 LAYOFF & PLANT CLOSURE CONSIDERATIONS The Worker Adjustment and Retraining Notification (WARN) Act requires advance notice to employees of impending mass layoffs and plant closures. Because an employer is only covered under the WARN Act if it has 100 or more employees,195 there are two distinct considerations when determining whether the WARN Act applies: 1. will a worker count towards the jurisdictional threshold?; and 2. is the worker entitled to notice? For a more in-depth discussion of the WARN Act requirements, see LITTLER ON REDUCTIONS IN FORCE.

§ 3.6(a) Independent Contractors Under the WARN Act Independent contractors, if properly classified, are not counted towards the threshold number of employees for a company when determining whether notice is required. Furthermore, independent contractors are not entitled to receive notice from the hiring entity, even if the threshold is met. According to the regulations promulgated under the WARN Act, factors considered to distinguish independent contractors from employees for WARN purposes include: de facto exercise of control, unity of personnel policies emanating from a common source and the dependency of operations. The real question is whether the independent contractor is sufficiently independent of the hiring entity.196

§ 3.6(b) Temporary Employees Under the WARN Act Temporary employees on the employer’s payroll are counted toward the threshold number of employees for jurisdictional purposes.197 They also must be counted in determining whether a plant closing or mass layoff has occurred.198 However, they are not entitled to notice if: (1) the plant closing is due to the completion of a particular project or undertaking; and (2) the affected employees were hired with the understanding that their employment was limited to the duration of that project or undertaking.199This exclusion from providing notice to temporary workers can apply to work that is “seasonal but recurring.”200 However, permanent seasonal employees— employees who are laid off with a clear expectation of being recalled each year— are not “temporary” workers under WARN, and therefore are entitled to notice.201 In addition, although a business may have “seasonal” fluctuations in its workload, if the employees are not hired for a specific contract or project they are not “temporary.”202

195

The WARN Act applies to any business enterprise employing: 100 or more full-time employees; or 100 or more employees, including part-time employees, who in the aggregate work at least 4,000 hours per week exclusive of overtime. 29 U.S.C. § 2101(a)(1)(A) and (B). 196 20 C.F.R. § 639.3(a)(2); Bradley v. Sequoyah Fuels Corp., 847 F. Supp. 863, 868 (E.D. Okla. 1994). 197 20 C.F.R. § 639.3(a)(3). 198 20 C.F.R. § 639.3(c)(2); DOL comments to 20 C.F.R. §§ 639.3(c), 639.5(a) (2007). 199 20 C.F.R. § 639.5(c). 200 20 C.F.R. § 639.5(c)(3). 201 Marques v. Telles Ranch, Inc., 867 F. Supp. 1438, 1443–44 (N.D. Cal. 1994), aff’d, 131 F.3d 1331 (9th Cir. 1997). 202 Washington v. Aircap Indus. Corp., 831 F. Supp. 1292, 1297 (D.S.C. 1993).

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§ 3.6(c) Part-Time Employees Under the WARN Act Part-time employment has a special definition under WARN that applies if, and only if, the employee was employed for an average of fewer than 20 hours per week or fewer than six of the 12 months preceding the WARN notice date.203 Part-time employees are entitled to notice under the WARN Act,204 but they generally are not counted toward the WARN Act thresholds.205 Part-time employees are counted, however, in determining employer coverage under the alternative 4,000 hours of work per week test. 206

§ 3.6(d) Leased Employees & the Use of Third-Party Firms Under the WARN Act Leased employees (such as temporary employees obtained from a temporary agency that acts as the primary employer) present special issues under the WARN Act. Where leased employees are not on a Client Company’s payroll, they may still need to be counted under a joint employment theory when determining whether the Client Company is covered by the WARN Act or when determining whether a job action has affected enough employees that WARN is triggered. In contrast, it appears that the Client Company that uses the services of a leased employee, but does not pay the leased employee, is not required to give that worker notice of a plant closing under the WARN Act. The appropriate regulations state in the definition of affected employees: “Consultant or contract employees who have a separate employment relationship with another employer and are paid by that other employer … are not ‘affected employees’ of the business to which they are assigned.”207 Thus, assuming that the leasing firm is responsible for payroll, it is likely responsible for compliance with the WARN Act—not the Client Company engaging the workers’ services. Employers using the services of leased employees should nevertheless be wary of joint employer issues under the WARN Act. This theory has been applied under a number of other statutes and may likely be applied under the WARN Act. Because the employer using the leased workers’ services will have advance notice of when a plant closing or layoff is scheduled to occur, that employer may well be charged with responsibility for giving leased workers notice on a joint employment theory, or at least giving the leasing firm sufficient notice to allow it to give the workers timely notice, despite the regulation noted above.

§ 3.7 LABOR RELATIONS & UNION CONSIDERATIONS The National Labor Relations Act (NLRA) protects the rights of employees to organize, to choose their own collective bargaining representatives and to engage or refrain from concerted activities for the purpose of collective bargaining, mutual aid or protection.208 For a more thorough discussion of bargaining units and employer obligations under the NLRA, see LITTLER ON UNION ORGANIZING and LITTLER ON COLLECTIVE BARGAINING.

203 204 205 206 207 208

20 C.F.R. § 639.3(h). 20 C.F.R. § 639.6(b). 20 C.F.R. § 639.3(a), (b), (c). 20 C.F.R. § 639.3(a)(1)(ii); Hollowell v. Orleans Reg’l Hosp. L.L.C., 217 F.3d 379, 384 n.6 (5th Cir. 2000). 20 C.F.R. § 639.3(e). 29 U.S.C. § 157.

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§ 3.7(a) Test for Employee/Independent Contractor Status Under the NLRA Independent contractors are specifically excluded from coverage under the NLRA. The National Labor Relations Board (NLRB or “Board”) administers and enforces the NLRA.209 Thus, the NLRB may be required to determine whether a worker is a protected employee, a joint employee or an excluded independent contractor for purposes of the NLRA. With one important caveat noted below, the Board employs what it calls the “right-to-control test” which is essentially a common law agency test emphasizing the right-to-control element. The NLRB has described the right-to-control test as follows: In determining the status of persons alleged to be independent contractors, the Board has consistently held that the Act required application of the right of control test. Where the one for whom the services are performed retains the right to control the manner and means by which the result is to be accomplished, the relationship is one of employment; while, on the other hand, where control is reserved only as to the result sought, the result is that of an independent contractor. The resolution of this question depends on the facts of each case, and no one factor is determinative.210 It is unclear how the 2015 NLRB decision in Browning Ferris Industries of California, Inc. (discussed below in § 3.7) will be applied to independent contractors, but the Board has made it clear it intends to apply the new broader legal test in the context of franchisee-franchisor relationships. With respect to independent contractors, in 2002, the District of Columbia Circuit Court of Appeals upheld a classification decision by the NLRB wherein the Board shifted the focus from the traditional right-to-control test to an alternative test that looked primarily at the worker’s “entrepreneurial opportunity for gain or loss.” In Corporate Express Delivery System v. NLRB, both the Board and the appellate court agreed that this test “better captures the distinction between an employee and an independent contractor.”211 The Board’s decision in Corporate Express created confusion for employers seeking to classify employees. An administrative decision thereafter clarified the test for determining a worker’s status for purposes of the NLRA.212 Allstate Insurance Co. held that enhanced weight should be given to the factors of entrepreneurial opportunity and proprietary rights in determining employee or independent contractor status under the NLRA. The issue in Allstate was whether a union could represent certain exclusive agents engaged by the company to solicit insurance products. The court held the exclusive agents were ineligible because they were independent contractors. In doing so, the court added weight to certain factors not related to “control,” such as: (1) entrepreneurial opportunity for gain or loss; (2) proprietary interest in the individual’s business; (3) ability to control the hiring of employees; (4) obligation to work each day; and (5) right to pursue outside business.213

§ 3.7(b) Joint Employer Status Under the NLRA In 2015, the NLRB adopted a new joint employer standard that overruled longstanding precedent.214 209 210 211 212 213 214

29 U.S.C. §§ 153, 159, 160. News Syndicate Co., 164 N.L.R.B. 422, 423–24 (1967). Corporate Express Delivery Sys. v. NLRB, 292 F.3d 777, 780 (D.C. Cir. 2002). Allstate Ins. Co., Case 13-RC-20827 (Region 13 Dec. 2, 2002). Allstate Ins. Co., Case 13-RC-20827. Browning Ferris Indus. of Cal., Inc.,, 362 N.L.R.B. No. 186 (2015).

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While the majority in Browning-Ferris Industries of California, Inc. insisted they were returning to the “traditional” joint employer standard, the end result of the change is that the definition of joint employment will encompass many more relationships involving a third-party firm. In this controversial decision, the Board created an “indirect control” standard for assessing joint employment. Specifically, the Board imposed a two-part test. First, the Board will find that two or more entities are joint employers of a single workforce if they share or codetermine those matters governing the essential terms and conditions of employment. To determine whether a putative joint employer meets this standard, the Board's initial inquiry is whether there is a common-law employment relationship with the workers in question. If this common-law employment relationship exists, the inquiry then turns to whether the putative joint employer possesses sufficient control over employees’ essential terms and conditions of employment to permit meaningful collective bargaining. Prior to the Board’s decision in Browning-Ferris, two employers were found to be “joint employers” only when the two entities actually exerted such direct and significant control over the same employees that they shared or co-determined matters governing the essential terms and conditions of employment.215 Relevant factors in making this assessment included the right to hire, terminate, discipline, supervise and direct the workers. In applying this test, administrative agencies and courts generally found that the control exercised by the putative joint employer must be actual, direct and substantial—not simply theoretical, possible, limited or routine.216 In Browning-Ferris, the Board rejected the requirement that the joint employer’s control be direct and immediate. The Board found that the direct control requirement was not compelled by common law, so the Board did not have to adhere to the current standard. Instead, the Board will evaluate the evidence to determine whether a Client Company that uses a third-party firm’s employees affects the means or manner of those workers’ work and terms of employment, either directly or indirectly. Under the new test, essential terms and conditions of employment include those matters relating to the employment relationship such as hiring, firing, discipline, supervision and direction. However, the Board expanded essential terms and conditions of employment to include, “dictating the number of workers to be supplied; controlling scheduling, seniority, and overtime; and assigning work and determining the manner and method of work performance.”217 The Board also focused on the contractual reserved rights to control the employment relationship, regardless of whether those rights are actually exercised. The change in the well-established joint employer standard is significant. The new standard in Browning-Ferris requires the Board, on a case-by-case basis, across multiple industries, to inject itself into complex business relationships, the structures of which are completely unrelated to labor relations. Both Firms and Client Companies will need to revisit and revise their current business practices and client service contracts to eliminate the risk of being found a joint employer under the NLRA, though the Board has given little guidance on how to guarantee non-joint status under the new standard. The new test may lead to the end of long-standing business relationships or a greater degree of influence by one employer over the terms and conditions of employment of another business to reduce risk and liability.

§ 3.7(c) Multi-Employer Bargaining Units The NLRB is responsible for determining whether a particular unit of employees is appropriate for 215

See TLI, Inc., 271 N.L.R.B. 798 (1984); NLRB v. Browning-Ferris Indus., Inc., 691 F.2d 1117, 1123 (3d Cir. 1982). 216 See TLI, Inc., 271 N.L.R.B. at 798; AM Prop. Holding Corp., 330 N.L.R.B. 998, 1001 (2007). 217 Browning Ferris Indus. of Cal., Inc.,, 362 N.L.R.B. No. 186 (2015).

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the purpose of collective bargaining. The NLRA provides that: “the Board shall decide in each case whether, in order to assure to employees the fullest freedom in exercising the rights guaranteed by this Act, the unit appropriate for the purposes of collective bargaining shall be the employer unit, craft unit, plant unit, or subdivision thereof.”218 Based on this language, the NLRB in H.S. Care L.L.C., d/b/a Oakwood Care Center had previously concluded that the broadest unit contemplated by the NLRA is an “employer unit” consisting of all employees employed by a single employer—as opposed to more than one employer.219 Multiemployer units can give rise to “significant conflicts among the various employers and groups of employees participating in the process.”220 Therefore, units including the employees of more than one employer are permissible only when all parties consent.221 However, the Board has strongly indicated these previous decisions are also subject to reconsideration. In July 2016, the NLRB reversed its decision in Oakwood Care Center and determined that a union seeking to represent employees in a bargaining unit composed of employees solely employed by a “user employer” (a company that hires temporary workers) and those jointly employed by the user employer and temporary labor provider is not required to obtain the consent of both employers. In Miller & Anderson, Inc., the Board held that in determining if a combined unit is appropriate, it will apply traditional “community of interest” factors.222 The Board added that, in a combined unit, a user employer is required to bargain over all terms and conditions of employment for unit employees it solely employs, but only the terms and conditions of employment of jointly-employed employees that it possesses the authority to control. Referencing the broad statutory purpose and provisions favoring collecting bargaining rights, the Board, in Miller & Anderson, found that nothing in the text of Section 9(b) explicitly mandated a consent requirement, nor was the term “employer unit” defined under that provision. It distinguished a “Sturgis-style” unit223 from a true “multi-employer” unit by noting that in a Sturgis unit, the user employer employs all employees in the unit, either jointly or solely, and all employees perform work side-by-side as part of a common enterprise. In contrast, a true “multi-employer” unit situation often involves employers who compete with each other, operate in separate locations, and hire their own employees. According to the NLRB’s reasoning, requiring consent of both the user employer and supplier 218

29 U.S.C. § 159(b). 343 N.L.R.B. 659, 663 (2004). 220 343 N.L.R.B. at 662. 221 343 N.L.R.B. at 662 (citing NLRB v. Truck Drivers Local 449, 353 U.S. 87, 96 (1957). 222 364 N.L.R.B. No. 39 (July 11, 2016). 223 In M.B. Sturgis, 331 N.L.R.B. 1298 (2000), the Board considered whether to approve a unit consisting of employees employed by M.B. Sturgis, plus a group of temporary employees employed by Sturgis and a staffing agency. The petition was initially dismissed because both Sturgis and the staffing agency did not consent to the inclusion of the employees in the same unit. The Board reversed, holding that the consent of both employers was irrelevant where the community of interest factors supported a combined unit of “user employees” (those employed by Sturgis) plus the employees jointly employed by Sturgis and the agency. The Board distinguished situations involving true “completely independent user employers” in multi-employer bargaining units from situations in which a user and supplier employer jointly employ individuals alongside the user’s solely-employed employees. While employer consent was still required in situations involving multiple employers where there was no common “user employer,” such consent was not required in cases like Sturgis, where the user employer employed all of the employees in the proposed unit, even if another entity partially employed some of those individuals as well. 219

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employer was too limiting on employees’ right to organize and determine whether they wished to be included in a mixed unit. While nothing under the Sturgis rule requires a unit of user and jointly-employed temporary agency employees, the Board found that allowing such units over the employers’ objections “assures the fullest freedom” to employees to either organize such groups separately or together. In contrast, according to the Board, the consent requirement precludes contingent workers from effectively organizing because they are often spread out among different “user” clients. The decisions in Browning-Ferris and Miller & Anderson put employers in a quandary. First, Browning-Ferris makes it much more likely that an entity will be deemed a “joint employer” with a temporary labor provider in circumstances in which such a relationship was never contemplated, and even where control over the subject employees is either nonexistent or minimal. Second, an employer that “jointly employs” temporary workers under the Browning-Ferris standard will be forced to recognize and bargain with a unit of both its own regularly employed workers and those temporary workers who work side-by-side with them , even though the latter workers’ terms and conditions of employment may be controlled entirely by a different employer—one that, in turn, exercises no control over the user-employer’s employees. As a practical matter, employers wishing to avoid this scenario under the NLRA will need to maintain clear separation between their own employees and temporary employees to ensure as little similarity between the groups as possible in terms of supervision, working conditions, integration/interchange, work location, and skills and duties.

§ 3.7(d) Temporary & Part-Time Employees Under the NLRA Temporary and part-time employees of unionized employers receive special treatment under the NLRA. In determining the appropriate scope of a collective bargaining unit, regular part-time employees are normally included unless the parties stipulate otherwise.224 The same test for unit inclusion applies to both regular part-time and dual-function employees—that is, “whether the employee is regularly employed for sufficient periods of time to demonstrate that he, along with the [regular] full-time employees, has a substantial interest in the unit’s wages, hours, and conditions of 225 employment.” Under certain circumstances, a temporary employee may be allowed to vote in a NLRB election, even though the temporary classification is not included within the described bargaining unit. In determining voting eligibility of temporary workers, the NLRB has applied the date-certain test. Under the date-certain test, an employee who is hired on a temporary basis but whose term of employment remains uncertain because a final termination date has not been established is eligible to vote so long as he or she was working on both the initial eligibility date and the date of the election. At least two courts reviewing this test have held that the date-certain test is the correct test to apply in the situation of a temporary worker.226 Thus, employers utilizing temporary employees should identify a specific termination date and, if later desired, may extend that date as necessary. The Second Circuit Court of Appeals has applied both the date-certain test and the reasonable-expectations test in determining voter eligibility of temporary workers. Under the reasonable-expectations test, an employee’s reasonable expectations of permanent employment 224

Bachmann Uxbridge Worsted Corp., 109 N.L.R.B. 868 (1954). Berea Pub. Co., 140 N.L.R.B. 516, 518–19 (1963); Engineered Storage Prods. Co., 334 N.L.R.B. No.138 (2001). 226 See NLRB v. S.R.D.C., Inc., 45 F.3d 328 (9th Cir. 1995); NLRB v. New England Lithographic Co., 589 F.2d 29 (1st Cir. 1978). 225

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within the bargaining unit are considered.227 In contrast to temporary workers, regular part-time employees performing bargaining unit work are eligible to vote in union elections, although there may be industry-specific exceptions.228 The NLRB’s decision in Miller & Anderson, Inc. increases the risk that an employer’s own workforce will be organized by virtue of the organizing whims of the temporary workforce’s employees. The consent requirement served as a firewall against such organizing and ensured that employees of distinct employers would only be combined if the parties both thought it made sense. While it is true that petitioning unions will need to establish that the user employees and temporary employees share a “community of interest,” such a fact-intensive inquiry provides little guidance or predictability. As noted in § 3.7(c), employers wishing to avoid this scenario under the NLRA will need to maintain clear separation between their own employees and temporary employees to ensure as little similarity between the groups as possible in terms of supervision, working conditions, integration/interchange, work location, and skills and duties. The difficulty is that maintaining adequate differences between temporary agency employees and regular employees in these areas often defeats the purposes and efficiencies associated with the use of temporary employees—who, by design, often work side-by-side with regular employees to supplement the workforce (“staff augmentation”). Employers who are unable to adequately maintain sufficient distinctions between their own employees and contingent workers in these areas will need to be prepared for the possibility that contingent worker organizing may lead to organization of the entire workforce in a combined unit, and must react to such organizing efforts as they would to those involving their own employees.

§ 3.8 FEDERAL CONTRACTORS & THE USE OF THIRD-PARTY FIRMS This section focuses on certain obligations that an employer may seek to pass to a third-party staffing firm. For a more in-depth discussion of the obligations of government contractors, see LITTLER ON GOVERNMENT CONTRACTORS & EEO OBLIGATIONS. Doing business with the government comes with an additional layer of equal employment obligations, enforced by the Office of Federal Contract Compliance Programs (OFCCP). These obligations often take many third-party firms by surprise because the direct contractor, to whom they are supplying temporary employees or contingent workers, never put the third-party agency on notice that it also had to comply with OFCCP’s regulations. Having never received notice, the agency suddenly finds itself being called upon either by its client—the direct government contractor—or by the OFCCP itself—to supply missing records. The search for records that could be several years old and decision makers that may or may not still be employed by the agency is time consuming and burdensome, not to mention costly in certain cases. For the reasons described below, the prudent agency will first determine whether the company with which it is dealing is a government contractor and what options it wishes to take to apportion such costs up front. There are five principal obligations of which staffing companies need to be aware: 1. recordkeeping;229

227

Kinney Drugs v. NLRB, 74 F.3d 1419 (2d Cir. 1996). See Motz Poultry Co., 244 N.L.R.B. 573 (1979); New York Univ., 205 N.L.R.B. 4 (1973) (excluding part-time college faculty). 229 41 C.F.R. §§ 60-1.12, 60-300.80, 60-741.80. 228

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2. applicant dispositioning;230 3. listing job vacancies with an employment service delivery system;231 4. engaging in meaningful outreach to qualified covered veterans and individuals with disabilities;232 and 5. ensuring that there is no adverse impact in its use of any tests in the selection process.233

§ 3.8(a) Recordkeeping & Applicant Dispositioning When government contractors realized the extent of the burdens related to recordkeeping and disposing of records that the OFCCP regulations imposed on them, they initially explored options to shift the responsibility to third-party vendors. The OFCCP realized, however, that if the obligation to comply could be transferred to a search firm or recruiting agency, absolving the government contractor from any responsibility for compliance, the entire purpose of the regulation would be eviscerated. Accordingly, when it issued its Frequently Asked Questions on the Internet Applicant rule, the OFCCP made it clear that at all times the compliance obligation rests with the contractor. As to third-party agencies, the OFCCP was equally clear: If a covered employer contracts with an employment agency to screen and refer job seekers using the employer’s selection procedures, what records must be maintained? The contractor’s recordkeeping obligations are the same whether it screens job seekers itself or whether it contracts with an employment agency to screen job seekers on its behalf with the employer’s selection procedures. If an employer contracts with an employment agency to screen job seekers on its behalf, it would be prudent to address expressly in its contract with the employment agency the records the agency will be expected to maintain regarding searches made on the employer’s behalf. The Executive Order recordkeeping obligation belongs to the Federal contractor, not the retained employment agency, and it is the contactor’s responsibility to ensure that the agency keeps for it whatever records the contractor will be expected to have.234 Can a contractor ask a recruiting firm to keep, on its behalf, the records required by the Internet Applicant Final Rule? OFCCP’s recordkeeping rules, including the Internet Applicant Final Rule, require Federal contractors and subcontractors to keep and maintain records regarding their selection process, including information about applicants and hires. The use of a recruiting firm 230

41 C.F.R. § 60-1.3 (“Internet Applicant”). 41 C.F.R. § 60-300.5(a)(2–6). 232 41 C.F.R. §§ 60-300.44(f) (veterans), 60-741.44(f) (qualified individuals with disabilities). 233 41 C.F.R. pt. 60-3, the Uniform Guidelines on Employee Selection Procedures. 234 U.S. Dep’t of Labor, Office of Federal Contract Compliance Programs, Internet Applicant Recordkeeping Rule, available at http://www.dol.gov/ofccp/regs/compliance/faqs/iappfaqs.htm.

231

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in the hiring process does not relieve a contractor of its recordkeeping obligations under 41 C.F.R. 60-1.12; the contractor will be held accountable if the specified records are not maintained. A contractor may ask that a recruiting firm keep records on its behalf so that the contractor can use the records to monitor its personnel practices and demonstrate compliance to OFCCP. Keep in mind, however, that under the Internet Applicant Final Rule, the recordkeeping obligations belong to the Federal contractor or subcontractor. A contractor cannot delegate its obligations to another firm and would be held accountable if required records were not maintained. The Executive Order does not impose separate recordkeeping obligations upon recruitment firms with respect to their referral practices to Federal contractors and subcontractors. [However, the staffing firm itself may be deemed a necessary subcontractor in fulfilling the government contract and it would be subject to the same recordkeeping requirements.] Accordingly, under the Executive Order, a recruiting firm’s obligations to retain records about referrals of job candidates to Federal contractor or subcontractor clients arise out of its agreements with those clients. Because contractors will be held accountable for keeping the required records, we suggest that recruiting firms and Federal contractors and subcontractors have a specific discussion about recordkeeping practices so that both parties understand what records must be retained, and by whom.235 If a government contractor has retained a third party to vet candidates as part of its selection process with the intent to hire the contingent worker at the end of a probationary period, the third-party sourcing agency is well advised to memorialize what role, if any, it has to comply with the OFCCP’s Internet Applicant definition and recordkeeping obligations. The OFCCP routinely follows through in audits of the direct government contractor to contact the third party agency involved in the hiring process, particularly if the OFCCP finds statistical evidence of disparate hiring rates between females and males, minorities and non-minorities, disabled and non-disabled applicants and veterans and nonveterans.

§ 3.8(b) Job Listings Under the regulations implementing the Vietnam Era Veterans Readjustment Assistance Act (VEVRAA), government contractors are required to list with an “employment service delivery system” every nonexecutive vacancy, for positions lasting more than three days, not being filled with an internal candidate, where the opening occurs.236 Listing the vacancy announcement with the state workforce agency job bank or with the local unemployment office will satisfy this requirement. If a government contractor has an existing relationship with a contingent worker agency, it has two choices to fulfill this requirement. Either it lists the vacancy itself with the employment service delivery system, and the job posting drives candidates back through its preferred agency for vetting,

235

U.S. Dep’t of Labor, Office of Federal Contract Compliance Programs, Internet Applicant Recordkeeping Rule, available at http://www.dol.gov/ofccp/regs/compliance/faqs/iappfaqs.htm. 236 41 C.F.R. § 60-300.5(a)(2).

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or it must arrange for the agency to comply with the listing obligation on its behalf.237

§ 3.8(c) External Outreach In addition to the mandatory job listing obligation, government contractors and necessary subcontractors are required to engage in specific outreach for qualified individuals with disabilities and veterans.238 There are websites listed on the OFCCP’s website (www.dol.gov/ofccp) as partner agencies, and resource referral directories sorting outreach agencies by region of the United States. Any contingent worker agency that stands in the shoes of the direct contractor in sourcing for employment candidates must engage in the same specific outreach as the direct government contractor and maintain records for two years in the event of an audit.

§ 3.8(d) Testing Many staffing firms test candidates prior to referring them to employers for placement or hire, and the discussion that follows is equally as applicable to non-government contractors as it is to government contractors. Although testing is covered by the Uniform Guidelines on Employee Selection Procedures (UGESP),239 which both the Equal Employment Opportunity Commission (EEOC) and OFCCP enforce, it has been the OFCCP that has been particularly aggressive in examining these practices in government contractor workplaces. In every one of the approximately 5,000 audits that the OFCCP conducts every year, it obtains hiring and applicant data and uses that data to evaluate hiring rates. When the government contractor’s or necessary subcontractor’s hiring rate for female, veteran, disabled or minority applicants is statistically significantly below the hiring rates for men, non-veteran, nondisabled and non-minorities, respectively, the OFCCP will further research the steps in the selection process. When it determines that the contractor is using a staffing firm and that the staffing firm administers any tests as part of the vetting process, the OFCCP will hone in on the test to determine whether the test is having an adverse impact. If the test has an adverse impact, the OFCCP expects the entity administering the test to have a bona fide validation study explaining how— notwithstanding the adverse impact—the test is job related and consistent with business necessity. It is critical to emphasize that under the UGESP, any entity that administers a test is legally obligated to record the race, disability and veteran status and gender of the person taking the test so it has the data necessary to evaluate pass/fail rates.240

237

See 41 C.F.R. § 60-300.5(a)(3) (“Listing of employment openings with the appropriate employment service delivery system pursuant to this clause shall be made at least concurrently with the use of any other recruitment source or effort and shall involve the normal obligations which attach to the placing of a bona fide job order, including the acceptance of referrals of veterans and nonveterans.”). 238 41 C.F.R. §§ 60-300.44(f), 60-741.44(f). 239 41 C.F.R. Part 60-3. 240 41 C.F.R. § 60-3.4.

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In addition to the OFCCP’s enforcement agenda, the EEOC’s position vis-à-vis staffing firms, is set forth in Question 7 of its 1997 Enforcement Guidance: If a worker is denied a job assignment by a staffing firm because its client refuses to accept the worker for discriminatory reasons, is the staffing firm liable? The staffing firm is liable for its discriminatory assignment decisions. Liability can be found on any of the following bases: (1) as an employer of the workers assigned to clients (for discriminatory job assignments); (2) as a third party interferer (for discriminatory interference in the workers’ employment opportunities with the firm’s client); and/or (3) as an employment agency for (discriminatory job referrals). The fact that a staffing firm’s discriminatory assignment practice is based on its client’s requirement is no defense. Thus, a staffing firm is liable if it honors a client’s discriminatory assignment request or if it knows that its client has rejected workers in a protected class for discriminatory reasons and for that reason refuses to assign individuals in that protected class to that client. Furthermore, the staffing firm is liable if it administers on behalf of its client a test or other selection requirement that has an adverse impact on a protected class and is not job-related for the position in question and consistent with business necessity.241 Because testing is a hot-button issue with both the OFCCP and the EEOC, staffing firms using tests (on their own initiative or at the behest of their clients) need to know whether the tests have an adverse impact based on these protected categories. If found to have an adverse impact, the staffing firm should have the test validated and evaluated for Title VII and UGESP compliance.

§ 3.9 SPECIALIZED EMPLOYMENT AGREEMENTS, TEMPORARY EMPLOYEES & TERM LIMITS § 3.9(a) Specialized Employment Agreements Companies frequently are interested in hiring specialized employees for limited periods of time. For instance, an executive may be hired to turn around a particular department. Specialists may be hired to implement a new computer system. When such temporary employees are released, problems may arise. Most of these problems can be avoided by agreeing to appropriate severance terms when entering into temporary arrangements. An employment agreement for specialized temporary employees should clearly set the term of employment and conditions of severance. It should also clearly set out the job duties and any applicable performance expectations. The term, although fixed at the outset, may be renewable to provide flexibility. The agreement should also provide for early termination of the agreement with or without cause and without a set amount of notice. Because companies often expose specialized temporary employees to sensitive or confidential 241

42 U.S.C. § 2000e-2(k); EEOC, Enforcement Guidance: Application of EEO Laws to Contingent Workers Placed By Temporary Help Agencies and Other Staffing Firms, Question 7 (Dec. 3, 1997), available at http://www.eeoc.gov/policy/docs/conting.html.

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information, appropriate restrictive covenants may be recommended as part of the employment agreement. In some states, the employee may agree not to compete with the employer for a time after the period of employment. Such an agreement must be appropriately limited in its length and geographic scope. In addition, the employee should agree to keep confidential all proprietary and confidential information, including any trade secrets. (For more detailed discussion of trade secrets and covenants not to compete, see LITTLER ON PROTECTION OF BUSINESS INFORMATION & RESTRICTIVE COVENANTS.

§ 3.9(b) Temporary Employees & Term Limits Many companies that use contingent workers provided by a third party (e.g., “staffing client” of a “staffing firm”) maintain policies that limit the duration of those workers’ services. Under these policies, when a contingent worker reaches a prescribed time limit, that worker’s services must be terminated automatically, regardless of the person’s job performance, and a replacement worker must be found or assigned by the staffing firm. While such term-limiting policies may be well intended, they are not always grounded in well-defined legal rules. As a result, there is little consistency in the policies that staffing clients have imposed. Some require replacement of contingent workers after a certain number of hours worked, but the maximum number of hours varies greatly, from just under 1,000 to 4,160, with many different rules in between. Others link limitations to the calendar, such as with 12-, 24-, or 36-month limits. After contingent workers are removed, additional rules may govern how soon they may return, varying from 31 days later, to one year later, to never. In part, these limits may be an attempt to avoid joint employment liability. However, determining whether a joint employment relationship exists is a fact-specific inquiry. Certainly working engagements lasting many years will be scrutinized by courts and by federal and state agencies. However, for most employment claims, it is the level of control exercised over the worker that is determinative of liability, not the length of the relationship. Such limits may also be an attempt by the staffing client to reduce the risk of liability for benefits plans and under the FMLA due to misclassification. Because eligibility for many benefits and for the FMLA are triggered by the length of employment and the number of hours worked, universally enforced term limits can limit or eliminate exposure for these narrow issues. However, term limits alone are not going to insulate staffing clients from legal liability for the vast majority of employment law claims.

§ 3.9(b)(i) Term Limits & FMLA Leave As noted above, one consideration relating to term limits is the possibility that a long-term contingent employee will become entitled to FMLA leave, which is unpaid but still potentially costly in other ways for the staffing client. This is a real possibility for contingent employees, since FMLA eligibility is triggered by 12 months of total service and more than 1,250 hours of service in the last 12 months with the primary employer (i.e., the staffing firm). However, term-limit policies only limit service to the staffing client; contingent workers may arrive on their first day already eligible for FMLA leave because of their prior service for the staffing firm working on assignments to other clients. The FMLA regulations require the staffing client, as a secondary employer, to accept the worker back in its workforce if the client is still utilizing other workers from the staffing firm.242 Importantly, limiting a term of work for the purpose of denying or 242

29 C.F.R. § 825.106(e).

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interfering with FMLA rights is also a violation of the FMLA.243

§ 3.9(b)(ii) Nonbenefit Problems Caused by Term Limits Term limits can create other legal problems that may be worse than the problems they are intended to solve. For example, when workers are “systematically” replaced, regardless of their level of performance, it may cast doubt on the company’s motivation, leaving workers to assume the reason was unfair, illegal or both. Further, if a qualified person in a legally protected class is replaced with a person not in the protected class, it creates a prima facie case of discrimination. Inconsistent application of term limits can facilitate favoritism by front-line managers, who may (inadvertently or intentionally) discriminate in their selective and subjective replacement of contingent workers. These unintended consequences may be far more serious—and expensive—than the risks associated with benefits liability. There are also costs associated with replacing workers that do not necessarily appear on a balance sheet or cash flow statement but which nonetheless impact a company’s bottom line: increased recruiting and training costs; time lost getting new workers up to speed with ongoing projects, understanding the culture and organizational structure; and discontinuity of service. Also, disgruntled workers, even if they do not bring legal actions, may spread negative perceptions about companies as a bad place to work. If termed-out contingent workers express dissatisfaction with particular companies, it may create further recruitment challenges in the future.

§ 4 PRACTICAL GUIDELINES FOR EMPLOYERS § 4.1 INDEPENDENT CONTRACTOR AUDIT QUESTIONNAIRE The following questionnaire addresses the primary issues for organizations to consider when assessing whether there is an independent contractor relationship. Business Structure of the Independent Contractor (“IC”) 1. Does the IC use his or her social security number as a Tax ID number? Yes

No

2. Does the IC have a business license? Yes

No

If yes: identify the business entity. 3. Is the IC an Individual/Sole Proprietor, or LLC Individual/Sole Proprietor? Yes

No

4. Is the IC a Partnership, or LLC Partnership? Yes

No

5. Does the IC have employees or non-employee assistants? Yes 243

No

29 C.F.R. §§ 825.106(e), 825.220(a).

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6. Does the IC have an office away from any Company or Company Customer facility? Yes

No

7. Does the IC have business signs or cards? Yes

No

8. Does the IC have a business license? Yes

No

9. Does the IC list his or her services in a business directory? Yes

No

10. Does the IC advertise his or her services to the general public? Yes

No

11. Does the IC maintain business insurance? Yes

No

Relationship with the Company 1. Has the IC been a direct W-2 employee of the Company within the last 12 months? Yes

No

2. Has the IC ever provided services to Company before? Yes

No

If yes: Are there differences between proposed and prior services? 3. How long has the IC performed work for the Company? _______________ 4. Is there an ongoing relationship between the IC and Company? Yes

No

5. Can the Company terminate the contract at any time, without incurring liability? Yes

No

6. Can the IC terminate the contract at any time, without incurring liability? Yes

No

7. Does the IC spend all or substantially all of his or her time performing work for the Company? Is this “full-time” work? Yes

No

8. Does the IC perform work for other companies? Yes

No

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9. Is the work performed by the IC an essential part of the Company’s regular business activity? Yes

No

10. Is the work performed by the IC also performed by employees of the Company? Yes

No

11. Does the IC wear a Company uniform? Yes

No

12. Does the Agreement require the IC to wear a uniform or other proper attire? Yes

No

13. Does the IC have its own logo (e.g., on a uniform, vehicle, name tag, e-mail signature, letterhead)? Yes

No

14. Does the IC use the Company logo (e.g., on a uniform, vehicle, name tag, e-mail signature, letterhead)? Yes

No

15. Does the IC have a Company e-mail address? Yes

No

16. Does the IC have keys or security pass/badge to Company property? Yes

No

17. Does the Company provide the IC with a computer? Yes

No

18. Does the Company provide the IC with a blackberry, cell phone, pager or similar device? Yes

No

19. Does the IC have access to Company intranet or electronic systems as provided to employees? Yes

No

20. Is the IC trained by the Company? Yes

No

21. Does the IC attend Company training or meetings? Yes

No

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22. Does the Company hire, supervise or pay the IC’s employees or non-employee assistants (e.g., temporary workers, other ICs)? Yes

No

23. Does the Company keep time and other records relating to the work of the IC in the same manner as it does for employees? Yes

No

Financial Terms 1. How is the IC paid? By the hour By the job By commissions Other 2. Is the IC responsible for expenses incurred in the performance of the work? Yes

No

3. Does the IC have opportunity for both profit and loss? Yes

No

4. Does the IC offer his or her services to the general public (as opposed to offering services only to the Company)? Yes

No

5. Has the IC made a significant investment in his or her business? Yes

No

6. Does the IC have economic risks or liabilities other than the risk of not getting paid (e.g., risk of damage to equipment, liability for paying assistants)? Yes

No

7. Does the IC furnish his or her own job-related tools, materials and other equipment? Yes

No

8. Must the Company pay the IC the full compensation if the job is not completed? Yes

No

9. Is the IC provided with employee benefits? Yes

No

10. Does the Company pay the IC out of the payroll accounts that it pays its employees? Yes

No

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Performance of the Work 1. Does the Company instruct the IC on when, where or how work is to be performed? Yes

No

2. Does IC set his or her own work hours? Yes

No

3. Does the IC primarily use Company equipment and facilities to do the work? Yes

No

4. Must the IC provide the services personally (as opposed to delegating tasks to someone else)? Yes

No

5. Must the IC perform his or her services on Company premises? Yes

No

6. Does the Company have the right to determine the order in which the IC’s services are performed? Yes

No

7. Is the IC required to submit interim or progress reports to the Company? Yes

No

8. Can the work be performed by any IC without requiring special skills? Yes

No

9. Does the Company usually direct or supervise the work performed by the IC? Yes

No

10. Does the IC control the work of his or her own employees? Yes

No

FICA & FUTA Statutory Employees 1. Is the IC a driver engaged in distributing for another: (Check all that apply) Meat products Vegetable products Fruit products

Bakery products Beverages other than milk Laundry or dry-cleaning services

If a box is checked: Does the IC have a substantial investment in facilities used to perform the services? Yes

No

Are the services performed by the IC part of a continuing relationship with the Company? Yes

No

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2. Is the IC a full-time life insurance salesman? Yes

No

If yes: Does the IC have a substantial investment in facilities used to perform the services? Yes

No

Are the services performed by the IC part of a continuing relationship with the Company? Yes

No

3. Is the IC a home worker? Yes

No

If yes: Does the home worker perform services according to specifications provided by service recipient? Yes

No

Does the home worker perform services using materials or goods supplied by the service recipient? Yes

No If yes: Is the home worker required to return the materials or goods once the work is completed? Yes No

Does the IC have a substantial investment in facilities used to perform the services? Yes

No

Are the services performed by the IC part of a continuing relationship with the Company? Yes

No

4. Is the IC a traveling salesperson who is engaged on a full-time basis in the solicitation of sales to wholesalers, retailers, contractors, or operators of hotels, restaurants, and similar establishments for: (a) merchandise for resale, or (b) supplies for use in the respective business operations? Yes

No

If yes: Does the IC have a substantial investment in facilities used to perform the services? Yes

No

Are the services performed by the IC part of a continuing relationship with the Company? Yes

No

Jurisdiction: In which State(s) is the worker performing services or maintaining a home office (essentially, in which state(s) is the worker most likely to file a claim for alleged unpaid overtime or minimum wage or file a claim for unemployment benefits)? ______________________________________________________________________

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§ 4.2 SAMPLE INDEPENDENT CONTRACTOR AGREEMENT INDEPENDENT CONTRACTOR AGREEMENT244 THIS INDEPENDENT CONTRACTOR AGREEMENT (the “Agreement”) is made between [COMPANY NAME], with its principal place of business in [geographic location], and [INDEPENDENT CONTRACTOR NAME], an independently contracting consultant offering [his or her] services to the general public (hereinafter referred to as “CONTRACTOR”) and is effective _________________, 20_____ (the “effective date”). WHEREAS [COMPANY NAME] is a [description of company’s business]. WHEREAS CONTRACTOR is engaged in an independently operating consultant, wholly separate from [COMPANY NAME]; WHEREAS CONTRACTOR is customarily engaged in an independently established trade and holds [his or her] consulting services out to the public for engagement, to anyone who wishes to engage [his or her] services; WHEREAS CONTRACTOR has the skills required to perform [his or her] independent trade, occupation or business without the need for any training from [COMPANY NAME]; WHEREAS Clients are individuals or entities who/which engage the services of [COMPANY NAME]; WHEREAS CONTRACTOR and [COMPANY NAME] desire to enter into this Agreement whereby CONTRACTOR will provide [COMPANY NAME] with unique knowledge and advice regarding particular Clients during the engagement period identified in the Agreement, and in exchange for payment as set forth herein, as between two independently operating businesses and not as between an employer and employee. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants set forth below, and for other good and valuable consideration, the parties agree as follows: 1.

Scope of Work: a.

[COMPANY NAME] hereby contractually engages the services of CONTRACTOR, and [COMPANY NAME] and CONTRACTOR agree to provide and render the services and payments, set forth in Exhibit A attached hereto, and any attachments and amendments thereto. The parties hereto agree that Exhibit A, and any attachments and amendments thereto, shall form a part of this Agreement and serve as the scope of work hereunder (“Scope of Work”). CONTRACTOR shall only communicate to and with those [COMPANY NAME] administrators, employees and/or designees identified by [COMPANY NAME] in connection with the Scope of Work and other matters contemplated herein.

b.

CONTRACTOR UNDERSTANDS AND AGREES THAT, IN PERFORMING SERVICES OR ANY OBLIGATION UNDER THIS AGREEMENT, CONTRACTOR SHALL BE AND WILL REMAIN AT ALL TIMES AN INDEPENDENT CONTRACTOR IN FACT AND LAW AND NOT AN

244

This is a sample agreement only and does not constitute and is not a substitution for consultation with legal counsel. The law in this area consistently changes and must be reviewed before implementing any agreement in this regard. This sample agreement should not be implemented or executed except on the advice of counsel. In addition, there may be important state law distinctions that will impact the inclusion of certain provisions.

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EMPLOYEE OF [COMPANY NAME] OR THE CLIENTS FOR WHOM [COMPANY NAME] PERFORMS SERVICES. c.

CONTRACTOR shall remain, at all times, responsible for the manner and means [he or she] provides [his or her] services and shall use own independent judgment and discretion with regard to the most effective manner and means to conduct [his or her] business subject to the Scope of Work, including CONTRACTOR’s hours of operation. In achieving the purpose of this Agreement and providing the services set forth in the Scope of Work, CONTRACTOR shall not be subject to direction from [COMPANY NAME] regarding the provision of those services nor shall [COMPANY NAME] exercise any direct control over CONTRACTOR. CONTRACTOR agrees to immediately bring to the attention of [COMPANY NAME] any instance [he or she] believes this provision is not being adhered to. [COMPANY NAME] SHALL NOT PROVIDE ANY TRAINING TO CONTRACTOR.

d.

The use of any employee, helper or assistant by CONTRACTOR is within the sole and exclusive discretion of CONTRACTOR.

e.

Nothing stated verbally by any [COMPANY NAME] employee or agent, and nothing in this Agreement should be inferred as creating a continuing relationship beyond the Scope of Work set forth in Exhibit A.

f.

CONTRACTOR shall remain responsible for and shall pay all operational costs and expenses related to the operation of [his or her] business including any payroll expenses for CONTRACTOR’S own employees, if any.

2.

NO RIGHTS TO BENEFITS: a. CONTRACTOR UNDERSTANDS AND AGREES THAT, DUE TO [HIS OR HER] STATUS AS AN INDEPENDENT CONTRACTOR ENGAGED IN [HIS OR HER] OWN INDEPENDENTLY CONTROLLED AND OPERATED BUSINESS, THAT CONTRACTOR IS NOT ELIGIBLE FOR, NOR SHALL PARTICIPATE IN, ANY [COMPANY NAME] PENSION PLAN, HEALTH OR DISABILITY PLAN, OR OTHER INSURANCE OR FRINGE BENEFIT PLAN OF ANY KIND. b. AS AN INDEPENDENTLY CONTRACTING BUSINESS ENTITY, CONTRACTOR IS NOT ENTITLED TO UNEMPLOYMENT INSURANCE BENEFITS UNLESS UNEMPLOYMENT COMPENSATION COVERAGE IS PROVIDED BY THE CONTRACTOR OR SOME OTHER ENTITY, AND CONTRACTOR IS OBLIGATED TO PAY FEDERAL AND STATE INCOME TAX ON ANY MONEYS PAID PURSUANT TO ITS CONTRACTUAL RELATIONSHIP WITH [COMPANY NAME]. c. AS AN INDEPENDENTLY CONTRACTING BUSINESS ENTITY, CONTRACTOR IS NOT ENTITLED TO WORKERS’ COMPENSATION BENEFITS UNLESS WORKERS’ COMPENSATION COVERAGE IS PROVIDED BY THE CONTRACTOR OR SOME OTHER ENTITY.

3.

Term and Termination: a.

The term of this Agreement shall commence on the effective date, indicated above and shall continue until _______________ (the “termination date”), however, upon any material breach of the Agreement the non-breaching party may immediately

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terminate the Agreement. Upon termination, [COMPANY NAME] shall have no liability to CONTRACTOR other than any money that may still be owed for services performed pursuant to the payment terms set forth herein. The provisions of paragraphs 7, 8, 10, and 11 shall survive the termination of this Agreement. b.

4.

5.

CONTRACTOR and [COMPANY NAME] agree that material breach of this Agreement shall include, but is not limited to, the following: (1)

Any curable breach of any provision of this Agreement, including the Scope of Work, that is not cured or otherwise resolved within fifteen (15) days of written notice being provided by the party claiming breach to the allegedly breaching party. Notice of an alleged breach must provide specific information as to the breach alleged and the specific provision of the Agreement that is alleged to have been breached; and

(2)

Any non-curable breach regarding the services the parties agree to perform or obligation the parties accept under the Scope of Work.

Consideration: a.

[COMPANY NAME] shall submit payments in accordance with the invoicing details set forth in Exhibit A.

b.

CONTRACTOR shall submit invoices on a bi-weekly basis, every other _________, detailing the days [he or she] has provided [his or her] services to [COMPANY NAME] in any given week, along with any other information requested by [COMPANY NAME] to ensure prompt and proper payment for CONTRACTOR’S services. [COMPANY NAME] will pay to CONTRACTOR pursuant to the agreed upon terms within seven (7) days of receipt of CONTRACTOR’S invoice.

c.

If CONTRACTOR disputes any amount paid by [COMPANY NAME], CONTRACTOR must bring [his or her] documented records of the disputed amount to the attention of [COMPANY NAME] within seven (7) days of the disputed payment. The absence of written notification from CONTRACTOR to [COMPANY NAME] of any dispute as described, and within the time frame indicated above will constitute CONTRACTOR’S acceptance of the amounts paid as complete, correct and accurate and will waive any right to dispute those payments.

d.

Except as otherwise required by law, [COMPANY NAME] shall not withhold any sums or payments made to CONTRACTOR for social security or other federal, state or local tax liabilities or contributions, and all withholdings, liabilities and contributions shall be solely CONTRACTOR’s responsibility.

e.

The parties understand and agree that under this agreement [COMPANY NAME] is not guaranteeing any specific payment to CONTRACTOR who continues to bear the risk of realizing a profit or incurring a loss based on the services CONTRACTOR performs.

CONTRACTOR Representations: CONTRACTOR hereby represents and warrants that (i) CONTRACTOR has the authority and right to enter into this Agreement, (ii) the services and Scope of Work contemplated and expressed in this Agreement, including Exhibit A, do

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not, and will not, infringe upon any rights of any third party, (iii) CONTRACTOR has and will maintain all required business licenses, vocational certifications or licenses required to complete the Scope of Work, if any, (iv) CONTRACTOR further warrants that [he or she] has formed [his or her] own company and is authorized to do business for which CONTRACTOR will provide a W-9 and taxpayer ID number (other than a social security number) [omit (iv) if not a corporation to corporation], (v) unless otherwise agreed in writing, CONTRACTOR will provide [his or her] own equipment and tools, and maintain proper licensing (software and other licenses) agreements, and (vi) CONTRACTOR will comply with all applicable laws, rules and regulations in the manner [he or she] deems most appropriate. 6.

Independent Contractor Status: CONTRACTOR and [COMPANY NAME] operate independent businesses and wish to form a business-to-business relationship. CONTRACTOR does not desire to be an employee of [COMPANY NAME] and wishes to operate as an independently contracting entity. Consequently, nothing in this Agreement precludes or limits CONTRACTOR from obtaining gainful employment or contracting with other companies or organizations as long as CONTRACTOR is able to fulfill [his or her] obligations under the Agreement and does not violate the terms set forth in paragraphs 7 or 8 of this Agreement.

7.

Confidentiality: In the course of performance of this Scope of Work, CONTRACTOR may acquire or receive information from [COMPANY NAME], [COMPANY NAME] Clients and/or others that is of a confidential nature. CONTRACTOR may also obtain information that [COMPANY NAME] deems confidential, including, but not limited to, trade secrets, investment strategies, Client information and unpublished technical information and data to which [COMPANY NAME] has proprietary rights. Confidential information shall further include information of a third party, which [COMPANY NAME] is under obligation to maintain in confidence. All such information shall be retained by CONTRACTOR in the strictest confidence and CONTRACTOR shall not use it for the benefit of CONTRACTOR or others or communicate it to others without [COMPANY NAME]’s prior written agreement. Nothing in this Agreement prohibits CONTRACTOR from reporting an event that CONTRACTOR reasonably and in good faith believes is a violation of law to the relevant law-enforcement agency (such as the Securities and Exchange Commission, Equal Employment Opportunity Commission, or Department of Labor), or from cooperating in an investigation conducted by such a government agency. CONTRACTOR is hereby provided notice that under the 2016 Defend Trade Secrets Act (DTSA): (a) no individual will be held criminally or civilly liable under federal or state trade secret law for the disclosure of a trade secret (as defined under the DTSA) that: (i) is made in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and made solely for the purpose of reporting or investigating a suspected violation of law; or (ii) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal so that it is not made public; and (b) an individual who pursues a lawsuit for retaliation by an employer for reporting a suspected violation of the law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret under seal, and does not disclose the trade secret, except as permitted by court order.

8.

Conflict of Interest: CONTRACTOR hereby represents that [he or she] does not have, and will not have, any actual or potential conflict of interest in connection with performing and

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fulfilling [his or her] obligations under this Agreement. In the event that CONTRACTOR learns of any actual or potential conflict of interest inconsistent with the foregoing representation, CONTRACTOR shall notify [COMPANY NAME] immediately thereof, and [COMPANY NAME] shall then have the right, in its sole discretion, to mandate the management of any such conflict or unilaterally change the Scope of Work in response thereto, or to terminate this Agreement with notice thereof to CONTRACTOR. 9.

Insurance Requirements: a.

If the Scope of Work necessitates travel on the part of CONTRACTOR, CONTRACTOR shall be solely responsible for the cost of [his or her] own automobile accidents and shall maintain, at its sole expense, an auto insurance policy with at least a $500,000 combined single limit.

b.

If subcontractors are utilized to complete any portion of the Scope of Work set forth in Exhibit A, proof of workers’ compensation and INDIVIDUAL medical insurance coverage is required. CONTRACTOR will defend, indemnify and hold harmless [COMPANY NAME] from any workers’ compensation claim or any other claim arising out of an accident or injury while CONTRACTOR, any of its subcontractors, or employees, is/are performing services related to this Agreement. CONTRACTOR SHALL NOT BE COVERED BY [COMPANY NAME]’s WORKERS’ COMPENSATION INSURANCE BECAUSE CONTRACTOR IS ENGAGED AS AN INDEPENDENT CONTRACTOR IN AN INDEPENDENTLY ESTABLISHED TRADE, OCCUPATION OR BUSINESS AND IS NOT AN EMPLOYEE OF [COMPANY NAME]. CONTRACTOR WILL PROVIDE WORKERS’ COMPENSATION INSURANCE COVERAGE TO THE CONTRACTOR’S EMPLOYEES, IF ANY.

c.

CONTRACTOR must provide proof [he or she] has obtained individual group health insurance for the CONTRACTOR.

10.

d.

CONTRACTOR ACKNOWLEDGES [he or she] IS NOT ENTITLED TO UNEMPLOYMENT INSURANCE, AND THAT TO THE EXTENT CONTRACTOR WANTS TO BE COVERED FOR THE SAME, CONTRACTOR WILL PROCURE [his or her] OWN INSURANCE OF THAT TYPE. CONTRACTOR will defend, indemnify and hold harmless [COMPANY NAME] from any unemployment insurance claim of either it or any of its employees or others that may claim to be employed by CONTRACTOR.

e.

CONTRACTOR shall maintain general liability insurance with at least a one million dollar policy limit and an Errors & Omissions policy with at least a one million dollar policy limit. CONTRACTOR shall be solely responsible for the costs related to purchasing and maintaining such insurance policies, including selection of the vendor(s) and manner through which such policies are obtained and shall keep an up-to-date policy declaration face page on file with [COMPANY NAME] at all times.

Use of [COMPANY NAME] Name, Logos and Marks: CONTRACTOR shall not use [COMPANY NAME]’s name, logos and marks, or any other proprietary designations thereof, in any manner and for any purpose, without the prior express written approval of [COMPANY NAME].

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11.

Liability/Indemnification: CONTRACTOR shall be responsible for, and shall indemnify fully, defend and hold harmless [COMPANY NAME], its officers, agents and employees, of and from, any and all claims, demands, causes of action, liabilities or damages, including legal costs and attorneys’ fees, arising out of any breach by CONTRACTOR of any provision of this Agreement or any acts or omissions of CONTRACTOR pursuant to this Agreement and Scope of Work.

12.

Arbitration: a.

In the event of any dispute, claim, question or disagreement arising from or relating to this Agreement or the breach thereof, or arising from any arrangement under this Agreement between CONTRACTOR and [COMPANY NAME] or CONTRACTOR’s clients; the parties hereto shall use their best efforts to settle the dispute, claim, question or disagreement. To this effect, the parties shall consult and negotiate with one another in good faith, in an attempt to reach a just and equitable solution, satisfactory to all parties. If informal resolution of the dispute, claim, question or disagreement cannot be reached, disputes that are within the jurisdictional maximum for small claims will be settled in the [State] Small Claims Court. With regard to other disputes, [COMPANY NAME] and CONTRACTOR mutually agree to resolve any justiciable disputes between them exclusively through final and binding arbitration instead of a court or jury trial. This agreement to arbitrate is governed by the Federal Arbitration Act (9 U.S.C. §§ 1-16) and shall apply to any and all claims arising out of or relating to this Independent Contractor Agreement, the CONTRACTOR’s classification as an independent contractor, CONTRACTOR’s provision of services to [COMPANY NAME] or its customers, the payments received by CONTRACTOR for providing services to [COMPANY NAME] or its customers, the termination of this Independent Contractor Agreement, and all other aspects of the CONTRACTOR’s relationship with [COMPANY NAME], past, present or future, whether arising under federal, state or local statutory and/or common law, including without limitation harassment, discrimination or retaliation claims and claims arising under or related to the Fair Credit Reporting Act, Defend Trade Secrets Act, Worker Adjustment and Retraining Notification Act, Civil Rights Act of 1964, Americans with Disabilities Act, Age Discrimination in Employment Act, Family and Medical Leave Act, Affordable Care Act, Uniformed Services Employment and Reemployment Rights Act, or Fair Labor Standards Act, state statutes or regulations addressing the same or similar subject matters, and all other federal or state legal claims, whether under a statute or the common law (for example, tort or contract claims) arising out of or relating to CONTRACTOR’s relationship or the termination of that relationship with [COMPANY NAME]. However, this agreement to arbitrate does not apply to litigation between CONTRACTOR and [COMPANY NAME] pending in a state or federal court as of the date of CONTRACTOR’s receipt of this Agreement, nor does it apply to any claim that may not be arbitrated as provided by an Act of Congress or lawful, enforceable Executive Order.

b.

If either party wishes to initiate arbitration, the initiating party must notify the other party in writing via certified mail, return receipt requested, within the applicable statute of limitations period. This demand for arbitration must include (1) the name and address of the party seeking arbitration, (2) a statement of the legal and factual basis of the claim, and (3) a description of the remedy sought. Any demand for arbitration shall be delivered to the address indicated in the notice terms of this

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Agreement, unless that address has been updated, in writing. c.

Class Action Waiver. [COMPANY NAME] and CONTRACTOR mutually agree that by entering into this Agreement, both waive their right to have any dispute brought, heard or arbitrated as a class action, collective action and/or representative action, and an arbitrator shall not have any authority to hear or arbitrate any class, collective or representative action. Notwithstanding any other clause contained in this Agreement or the AAA rules, as set forth below, any claim that all or part of this Class Action Waiver is unenforceable, unconscionable, void or voidable may be determined only by a court of competent jurisdiction and not by an arbitrator. In any case in which (1) the dispute is filed as a class, collective, representative or private attorney general action, and (2) there is a final judicial determination that all or part of the Class Action Waiver is unenforceable, the class, collective, representative and/or private attorney general action to that extent must be litigated in a civil court of competent jurisdiction, but the portion of the Class Action Waiver that is enforceable shall be enforced in arbitration.This Agreement does not prevent the filing of charges with a government agency like the Department of Labor, NLRB, or the EEOC or participation in any investigation or proceeding conducted by a government agency.

d.

If the parties can not otherwise mutually agree upon an arbitrator, any arbitration shall be governed by the American Arbitration Association Commercial Arbitration Rules, except as follows: (1)

The arbitration shall be heard by one arbitrator selected in accordance with the AAA Rules. The arbitrator shall be an attorney with experience in the law underlying the dispute or a retired judge.

(2)

If the parties cannot otherwise agree on a location for the arbitration, the arbitration shall take place in the __________ County, [State].

(3)

Each party will pay the fees for his, her or its own attorneys, subject to any remedies to which that party may later be entitled under applicable law. However, in all cases where required by law, [COMPANY NAME] will pay the arbitrator’s and arbitration fees. If under applicable law [COMPANY NAME] is not required to pay all of the arbitrator’s and/or arbitration fees, such fee(s) will be apportioned between the parties in accordance with said applicable law, and any disputes in that regard will be resolved by the arbitrator; or Unless applicable law provides otherwise, as determined by the arbitrator, the parties agree that [COMPANY NAME] shall pay all of the arbitrator’s fees and costs.

(4)

The arbitrator may issue orders (including subpoenas to third parties) allowing the parties to conduct discovery sufficient to allow each party to prepare that party’s claims and/or defenses, taking into consideration that arbitration is designed to be a speedy and efficient method for resolving

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disputes. (5)

Except as provided in the Class Action Waiver, the arbitrator may award all remedies to which a party is entitled under applicable law and which would otherwise be available in a court of law, but shall not be empowered to award any remedies that would not have been available in a court of law for the claims presented in arbitration. The arbitrator shall apply the state or federal substantive law, or both, as is applicable.

(6)

The arbitrator may hear motions to dismiss and/or motions for summary judgment, and will apply the standards of the Federal Rules of Civil Procedure governing such motions.

(7)

The arbitrator’s decision or award shall be in writing with findings of fact and conclusions of law. Judgment may be entered on the arbitrator’s decision or award in any court having jurisdiction.

(8)

The AAA Rules may be found at www.adr.org or by searching for “AAA Commercial Arbitration Rules” using a service such as www.Google.com or www.Bing.com or by asking [COMPANY NAME] Human Resources Department to provide a copy.

e.

Nothing herein is intended to or shall preclude [COMPANY NAME] or CONTRACTOR from filing a complaint and/or charge with any appropriate federal, state or local government agency and/or cooperating with said agency in its investigation. Nonetheless, [COMPANY NAME] and CONTRACTOR acknowledge that to the fullest extent permitted by law they shall not be entitled to receive any private relief, recovery, or monies in connection with any governmental complaint or charge, without regard as to who brought said complaint or charge. All monetary relief will only be available through small claims court or arbitration.

f.

Either Party may bring an action in a court of competent jurisdiction to compel arbitration under this Agreement, to enforce an arbitration award, or to review an arbitration award. In an action to review an award, the standard of review applied will be the same as that applied by an appellate court reviewing the decision of a trial court sitting without a jury, without any special deference to the arbitrator.

g.

CONTRACTOR and [COMPANY NAME] expressly waive trial by jury for all claims covered by this Agreement. All other rights, remedies, exhaustion requirements, statutes of limitation and defenses applicable to claims asserted in a court of law will apply in the arbitration. CONTRACTOR and [COMPANY NAME] agree that arbitration as explained herein provides a fair and adequate mechanism for enforcing the Parties’ statutory rights.

h.

CONTRACTOR agrees and acknowledges that entering into this arbitration agreement does not change [his or her] status as an independent contractor in fact and in law, and that CONTRACTOR is not an employee of [COMPANY NAME] notwithstanding this arbitration agreement.

i.

This arbitration agreement is the full and complete agreement relating to the formal resolution of disputes covered by this arbitration agreement. In the event any portion

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of this arbitration agreement is deemed unenforceable, the remainder of this arbitration agreement will be enforceable.

j.

13.

Arbitration is not a mandatory condition of CONTRACTOR’s relationship with [COMPANY NAME], and therefore you may submit a statement notifying the Company that you wish to opt out and not be subject to this arbitration agreement. If you want to opt out, you must notify [COMPANY NAME] of your intention to opt out by submitting a signed and dated statement on an “Arbitration Agreement Opt Out Form” that can be obtained from and returned to ([ADDRESS] [Fax] ___.___.____) or by submitting a written notice to ([ADDRESS] [Fax] ___.___.____) stating that you are opting out of this arbitration agreement. You also may opt out by sending an email to [COMPANY NAME] stating your intention to opt out. In order to be effective, your opt out notice must be provided within 30 days of your receipt of this Agreement. If you opt out as provided in this paragraph, you will not be subject to any adverse action as a consequence of that decision and may pursue available legal remedies without regard to this arbitration agreement. If you do not opt out within 30 days of your receipt of this Agreement, continuing your relationship with [COMPANY NAME] constitutes mutual acceptance of the terms of this arbitration agreement by you and [COMPANY NAME]. You have the right to consult with counsel of your choice concerning this arbitration agreement.

Notices: Any notice required or permitted to be made by either party under the terms hereof shall be in writing and shall be given in person, by facsimile, receipt-confirmed email, or by United States certified mail, return receipt requested. Notices shall be sent to the following address or such other address as may be designated in writing by that party: [COMPANY NAME] Attention: ____________ [Contact information: address, fax, e-mail] CONTRACTOR Attention: ____________ [Contact information: address, fax, e-mail]

14.

Disclaimer of Agency: Except as expressly necessary to fulfill the Scope of Work, CONTRACTOR shall not act as the agent of [COMPANY NAME] or enter into any binding agreements on behalf of [COMPANY NAME].

15.

Severability: In the event that any term of this Agreement is or becomes or is declared to be invalid or void by any court of competent jurisdiction, such term or terms shall be null and void and shall be deemed deleted from this Agreement, and all the remaining terms of the Agreement shall remain in full force and effect.

16.

Non-Waiver: The failure of either party in any one or more instances to insist upon strict performance of any of the terms and conditions of this Agreement shall not be construed as a waiver or relinquishment, to any extent, of the right to assert or rely upon any such terms or conditions on any other occasion.

17.

No Assignment: Neither party may assign this Agreement, in whole or in part, without the prior written consent of the other party.

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18.

Governing Law: The validity, performance and construction of this Agreement shall be governed by the laws of the State of __________.

19.

Right to Rescind Agreement: This Agreement may be rescinded by either party, without penalty, within 72 hours after execution hereof. Such notice of rescission shall be in writing and sent by Certified Mail, Return Receipt Requested.

20.

Entirety of Agreement/Amendment: This Agreement, including any exhibits attached hereto, sets forth the entire agreement and understanding of the parties relating to the subject matter contained herein and merges all prior discussions between them, and neither party shall be bound by any representation or term other than as expressly stated in this Agreement or by a written amendment to this Agreement signed by authorized representatives of both parties.

21.

Signature: This Contract may be signed and is enforceable by electronic signature and facsimile.

IN WITNESS WHEREOF, [COMPANY NAME] and CONTRACTOR have executed this Agreement as of the date first set forth above. [COMPANY NAME] By: Printed Name: Title: CONTRACTOR By: Printed Name: Title:

EXHIBIT A Scope of Services (to be performed by Contractor): CONTRACTOR shall . . . . All services shall be performed under this Agreement during the period of its operation, between the effective date (___/___/______) and the termination date (___/___/______). Compensation or Invoicing Details: CONTRACTOR agrees that in mutual consideration for entering into this agreement, [COMPANY NAME] shall pay to CONTRACTOR . . . . Payment shall be made to ______________________________________.

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§ 4.3 GUIDELINES FOR STRUCTURING A THIRD-PARTY, CONTINGENT WORKFORCE RELATIONSHIP § 4.3(a) Relationship Between a Third-Party Firm & the Client Company The following general guidelines are designed to increase the likelihood that a Third-Party Firm (“Firm”) will qualify as the common-law employer of workers who perform services for Client Companies: • The Firm’s duty to pay wages to workers should not be conditioned on receipt of funds from a Client Company. • The Firm should bill Client Companies a flat hourly rate without any disclosure of the allocation of the hourly rate as between wages, payroll taxes, benefits and profit. Where possible, the Firm should not inform the Client Company of the wage rate being paid to employees (this is especially important for federal income tax purposes). • The Firm should conduct periodic on-site visits to assess and address human resource issues. Ideally, this would be done by assigning to a Client Company a Firm representative. • The recordkeeping and reporting of hours worked should be handled by the Firm, not the Client Company. • The Client Company should not maintain any employment records apart from emergency information. • The Firm should be responsible for conducting employee evaluations and taking action based on those evaluations. • The Firm should assume all personnel responsibilities for the employees. • Due to the NLRB’s Browning-Ferris decision,245 the Client Company should avoid any direct or indirect control or reservation of rights regarding hiring, firing and other human resources decisions. A Client Company should avoid having language in their Firm contracts that indicates the Client Company maintains any level of control for such human resources decisions. • The Client Company should direct all internal and external communications pertaining to human resource issues to the Client Company’s firm representative. While not all of the foregoing is absolutely necessary to establish the lack of a joint employment relationship, these factors serve to provide a general sense of the type of relationship that would be needed for a Client Company to avoid being deemed a common law employer of workers who perform services for Client Companies.

245

Browning Ferris Indus. of Cal., Inc., 362 N.L.R.B. No. 186 (2015); see also discussion at § 3.7(b).

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§ 4.3(b) Relationship Between a Third-Party Firm & Workers Consider the following guidelines when structuring the relationship a Firm will have with workers: • The Firm should maintain an employee handbook that applies to all workers. The handbook would instruct workers to, for example: • report the number of hours worked to a designated Firm employee; • communicate any work-related complaints or injuries to a designated Firm employee or through a special 800 number and/or intranet site; • comply with a stated dress code; • always represent themselves to third parties as employees of the Firm; • always carry a Firm employee identification card during normal work hours; and • comply with other employment policies established by the Firm. • The handbook also should describe the employee benefits available through the Firm and advise workers of the Firm’s employee review procedure and its procedure for appeal of a contested review. • The Firm should have its own standardized guidelines for expense reimbursement, including a fixed per diem for out-of-town travel. • The Firm should establish its own vacation pay policy to apply to all workers. • The Firm should maintain all employee records. • Workers should report their hours worked to the Firm so that the Firm can calculate the amount of wages payable and the applicable payroll taxes. This information (other than hours worked) should not be shared with Client Companies. • The Firm should retain the right to hire and fire. • Although a Firm could consider advice provided by a Client Company on hiring and firing decisions, the Firm should be the party that retains the ultimate right to make such decisions. • If a Client Company becomes dissatisfied with a worker’s performance and the Firm disagreed with the Client Company’s assessment, the Firm could seek to transfer the individual away from the complaining Client Company to a different Client Company that operates in a similar line of business. • The Firm should handle all screening of, and perform all background checks for, employment applicants. • The Firm should perform drug testing when necessary and appropriate.

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• The Firm should provide workers with a periodic employee newsletter reiterating its role as employer. The newsletter would, for example: • remind workers of the toll-free phone number and/or intranet site to use for communicating important information to the Firm; • advise workers of relevant information concerning employee benefit programs, e.g., open season for health benefit plans; • advertise for job openings at different Client Company locations (if deemed appropriate and not offensive to Client Companies); and • advise workers of any changes in applicable employment policies. • All workers should sign an employment acknowledgment with the Firm. The acknowledgment should: • contain a noncompete provision that restricts a worker from performing similar services for the Client Company other than as an employee of the Firm for a specified period of time after termination of employment with the Firm, unless the Firm waives the restriction; • prohibit workers from moonlighting without the Firm’s permission; • authorize the Firm to transfer a worker from one Client Company to another; and • state that the Firm and the worker each have the right to terminate the employment arrangement at any time for any reason. • The Firm should establish all policies for complying with applicable federal laws and regulations (e.g., the Fed-OSH Act, EPA and applicable employment laws). • The Firm should provide all managers and supervisors with manager training to educate them on how to comply with applicable federal laws and regulations. The training would be mandatory. • Supervisors and managers who work in similar industries should be required to attend an annual Firm meeting where the individuals would meet to develop a “best-practices” approach for complying with the federal laws and regulations that apply to their industry. Discussion of business or production methods would be prohibited. • The Firm should be responsible for conducting employee evaluations and taking action based on those evaluations. • The Firm should require complaints of harassment and other employment complaints be directed to the Firm. Safety concerns should be reported to both the Client Company and the Firm.

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§ 4.4 SAMPLE WORKER ACKNOWLEDGEMENT & NONDISCLOSURE AGREEMENT This sample agreement uses the term “CLIENT” to refer to the Client Company that receives the worker’s temporary services and “THE COMPANY” to refer to the third-party firm that employs the worker. WORKER ACKNOWLEDGEMENT AND NONDISCLOSURE AGREEMENT246 This Agreement, effective this ___ day of ________________, is between myself, _____________________________________, CLIENT (“CLIENT”) and THE COMPANY. I am entering into this Agreement as a Contract Worker to provide temporary services for the benefit of THE COMPANY. I affirm that I have all necessary rights, authorizations and licenses to provide the services contemplated by this Agreement and that the temporary services I provide will not constitute a breach of any agreement to which I have previously entered into, nor constitute infringement of any patent, or copyright, or constitute an unauthorized use of proprietary information or trade secrets of a person not a party to this Agreement. Nor will I use any information in any manner that would constitute a violation of any undertaking or agreement with a prior employer or other person. Nature of Relationship. I acknowledge that I am an employee of THE COMPANY and THE COMPANY has assigned me to provide temporary services to CLIENT. Consequently, THE COMPANY is the sole entity responsible for providing me any earned compensation and benefits. I will not be eligible to receive any kind of compensation or benefits from CLIENT and will not be eligible to participate in any of CLIENT’s employee-benefit plans, fringe-benefits plan or any employee-bonus plan, and I acknowledge that I will not have a right to participate in such CLIENT plans or benefits while I am a Contract Worker. Confidentiality and Non-Disclosure. CLIENT’s non-public information and materials including, but not limited to: discoveries, inventions (including but not limited to improvements or modifications) or literary or other works related to the work performed under this Agreement or suggested by matters disclosed in conjunction with my assignment, whether or not patentable, copyrightable or otherwise subject to registration or protection which are made or conceived by me, solely or jointly with others, are considered proprietary and confidential (“Confidential Information”). This Confidential Information that I may be or have been exposed to may belong to THE COMPANY or to CLIENT, or their affiliates, employees, customers or vendors. I will hold all Confidential Information obtained by reason of my service to THE COMPANY and CLIENT in strict confidence, and will not copy, disclose or use it except as authorized by THE COMPANY and for THE COMPANY’S benefit and will keep such Confidential Information in a secure location. Moreover, I agree to not improperly solicit Confidential Information. If anyone tries to compel me to disclose any Confidential Information, by subpoena or otherwise, I will immediately notify THE COMPANY’S legal counsel so that THE COMPANY may take any action necessary to protect its interests or the 246

This is a sample agreement only and does not constitute and is not a substitution for consultation with legal counsel. The law in this area consistently changes and must be reviewed before implementing any agreement in this regard. This sample agreement should not be implemented or executed except on the advice of counsel. In addition, there may be important state law distinctions that will impact the inclusion of certain provisions.

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interests of CLIENT. I hereby acknowledge that such disclosure, if unauthorized, will cause irreparable injury to THE COMPANY and/or CLIENT. My agreement to protect Confidential Information will apply both while I am providing services to CLIENT and after my placement at CLIENT ends, regardless of the reason it ends. Upon THE COMPANY or CLIENT’s request, I will promptly return to THE COMPANY all Confidential Information, together with all copies and extracts. I understand nothing in this Agreement prohibits me from reporting an event that I reasonably and in good faith believe is a violation of law to the relevant law-enforcement agency (such as the Securities and Exchange Commission, Equal Employment Opportunity Commission, or Department of Labor), or from cooperating in an investigation conducted by such a government agency. I understand I am being provided notice that under the 2016 Defend Trade Secrets Act (DTSA): (1) no individual will be held criminally or civilly liable under federal or state trade secret law for the disclosure of a trade secret (as defined under the DTSA) that: (a) is made in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and made solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal so that it is not made public; and (2) an individual who pursues a lawsuit for retaliation by an employer for reporting a suspected violation of the law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret under seal, and does not disclose the trade secret, except as permitted by court order. THE COMPANY and CLIENT Materials and Data Protection. I will safeguard and return to THE COMPANY or CLIENT, when my placement with CLIENT ends, or sooner if THE COMPANY requests, all documents, materials, tools, electronic media and other property in my care, custody or control relating to my services for CLIENT, including without limitation any tangible or electronic documents that contain THE COMPANY or CLIENT Confidential Information. I agree to protect, handle, manage, store, transmit and discard any Confidential Information accessible to me, regardless of its format, in a manner that ensures that the Confidential Information is: (1) held in the strictest confidence; and (2) inaccessible to anyone that is not an authorized employee or representative of THE COMPANY. Job-Related Injury or Illness. Because THE COMPANY is my employer, I acknowledge that I am required to report all job-related injuries or illnesses to THE COMPANY. I also agree to promptly report any job-related injuries or illnesses to CLIENT’s and THE COMPANY’S designated representative. CLIENT and THE COMPANY’S Policies. Even though THE COMPANY is my employer, I agree to comply with all of THE COMPANY’S and CLIENT’s rules of conduct, including but not limited to: anti-harassment, anti-discrimination and anti-retaliation policies, safety policies, drug and alcohol policies, other workplace policies and codes of business conduct, which policies and orientation will be timely provided by CLIENT or THE COMPANY.

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Background Screening and Reference Check. I acknowledge that THE COMPANY performed a Background Check on me that may include an investigation for criminal records, verification of my education, employment history, confirmation of any professional licenses, and checking of employment and personal references. I authorize THE COMPANY to release information concerning this Background check to CLIENT, including but not limited to a copy of the information gathered about me and any oral or written reports. The obligations created by this Agreement survive the termination of my candidacy for placement, my placement at CLIENT and my employment with THE COMPANY. This Agreement is binding on me, my heirs, executors, personal representatives and legal successors, and is intended to benefit THE COMPANY and its successors and assigns. [Contract Worker’s Signature] [Contract Worker’s name – please print]

DATE

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Littler on Classifying Workers