Redesigning the Workforce

REDESIGNING

THE WORKFORCE

BY AMY KOMOROSKI WIWI & LAUREN M. HOLLENDER

As companies take advantage of alternative staffing options, they need to be aware of legal implications on both state and national levels.

THERE ARE SOME VERY ATTRACTIVE REAsons why companies hire workers who aren’t on the payroll or who work in locations beyond the companies’ offices. Chief among them are opportunities to reduce costs and increase the retention and satisfaction of staff members.

Yet at the same time, there are legal implications related to three different outside-the-general-workforce options: independent contractors, remote workers and temporary workers that are contracted through staffing agencies. Let’s look at the issues, and attractive aspects, of each one in turn.

INDEPENDENT PROS & CONS

There are some compelling reasons why companies hire independent contractors. In doing so, they can avoid significant wage, tax and benefit obligations associated with full-time staff members. They also don’t need to worry about payroll taxes, overtime, workers’ compensation and unemployment insurance, or paid sick leave.

However, misclassification of workers as independent contractors deprives workers of important benefits, as well as the protection of anti-discrimination and workplace safety laws that often only protect “employees.” In addition, misclassification adversely impacts state and local governments, which claim to lose millions of dollars in foregone tax and benefit contributions.

As a result, independent contractor audits and lawsuits have become increasingly common, resulting in significant costs and penalties.

Unfortunately, proper classification of workers as independent contractors is not as simple as a written agreement between the parties. An all-purpose test to determine independent contractor status does not exist. And compliance is often complicated by the fact that different federal and state tests apply.

Recently, California and New Jersey have taken

the lead in what is likely to become a national trend, passing legislation that makes it more difficult to classify workers as independent contractors. This has dealt a harsh blow to the media industry, which has come to rely heavily upon independent contractors. Re-classification can increase job costs up to 30%.

California’s Legal Moves – In 2018, the California Supreme Court adopted the threepart “ABC test” for determining whether a person may be classified as an independent contractor (Dynamex Operation West, Inc. v. Superior Court). The test was recently codified by California statute, Assembly Bill 5 (AB 5). As of Jan. 1, 2020, it applies to most California workers.

Under the ABC test, a worker is presumed an employee, unless the hiring entity satisfies all three of the following conditions: A) The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; B) The worker performs work that is outside the usual course of the hiring entity’s business; C)The worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

In meeting the first criteria, a business need not control the precise manner or details of the work that an employer ordinarily possesses over its employees. Further, contracted workers who provide services in a role comparable to that of an existing employee will likely be viewed as working in the usual course of the hiring entity’s business.

Part C requires that the independent business operation actually be in existence at the time the work is performed. This criteria is not met if an individual’s work relies on a single employer.

Companies based outside of California are subject to AB 5 for any worker performing services in the state. Both California residents and out-of-state residents who are hired to perform significant services in California are also likely covered by the law.

Specific occupations are exempt from AB 5, including certain freelance newspaper distributors and newspaper carriers until Jan. 1, 2021. Limited industry exemptions under AB 5 exist for professional services provided by a freelance writer, editor, photographer, photojournalist or newspaper cartoonist who does not provide content submission to their employer more than 35 times per year.

“Fine artists” are included in the list of exemptions, but the term is not defined. It is unclear whether actors, singers, dancers or musicians are covered by the exemption.

The media industry has yet to find a clear solution to this change in California law. Some have shut down, moved out of state or turned to out-of-state workers. Others have searched to cut expenses in order to offset the costs associated with

reclassification. Lobbyists have also been hired to pursue statutory amendments providing additional exemptions, and legal challenges have been filed.

New Jersey’s Approach – The Garden State has relied upon an ABC test that’s slightly broader than the one adopted in California. It was initiated in 2015, an outcome of Hargrove v. Sleepy’s LLC. However, the New Jersey state Senate recently introduced Bill 4204, which proposes a stricter version of the test more aligned with California’s. The bill has stalled, but efforts to modify the ABC test are not dead.

This past January, New Jersey Gov. Phil Murphy signed six bills into law related to the test. One requires businesses to post notices regarding misclassification.The state is also imposing higher penalties for misclassification. And it has authorized stop-work orders by the New Jersey Department of Labor and Workforce Development for violations of wage, benefit or tax laws. In addition, there are new rules related to joint liability of a client employer and labor contractor for violations of state wage and hour laws as well as tax laws.

Significantly, New Jersey law now provides that “any individual acting on behalf of an employer” may be held liable as the employer for such violations, including “an owner, director, officer or manager.” This should give employers significant pause.

REMOTE WORKER OPTION

It has become common for employers to offer remote-work arrangements to employees who conduct business from home. These arrangements can be mutually beneficial: employees get additional flexibility and save the time and money associated with commuting, while employers expand their available talent pool and save money on office space and supplies. Yet there are many issues to consider in advance of this type of hire.

One involves privacy and security. Employees may have access to a wide range of confidential business information that is being exchanged over wireless networks. Employers must ensure that remote employees’ home files and equipment are secure.

Companies based outside of California are subject to AB 5 for any worker performing services in the state.

THE AGENCY AGREEMENT

WHEN USING THE SERVICES OF AN AGENCY TO OBTAIN THE SERVICES of temporary workers, it’s wise to have a temporary staffing agreement that identifies the agency’s obligations. This will help avoid joint-employment liability issues.

The agreement should require that an agency: ■ Recruit, screen, interview and hire the worker; ■ Ensure the worker is legally authorized to work in the U.S.; ■ Pay the worker’s wages and provide other required benefits; ■ Pay, withhold and transmit payroll taxes; ■ Provide unemployment, workers’ compensation, and paid family leave insurance and paid sick leave as required by law; ■ Handle workers’ compensation and unemployment claims; ■ Have the workers acknowledge in writing that they are employees of the staffing agency alone and that they are not employees of the client company; ■ Have the worker sign a confidentiality agreement and an intellectual property rights agreement (if applicable).

Also be aware that there are state-specific regulations related to non-compete covenants that restrict staff members from working for a competitor upon the conclusion of employment. For example, with very limited exceptions, California prohibits the enforcement of non-competes upon employees altogether. Other states, like New York, allow them when the covenant is deemed reasonable.

Frequently, employers wish to classify remote workers as independent contractors to reduce payroll taxes and other labor costs. However, as discussed above, an employer’s lack of control over a remote worker’s daily activities generally does not determine a worker’s status.

Wage and hour issues also need to be addressed. When remote workers are performing duties from multiple states, they need to be paid in accordance with both federal and applicable state laws.

The federal Fair Labor Standards Act (FLSA) requires employers to pay employees for all hours worked and to keep accurate records of time spent on the job. It is often difficult to know how many hours remote employees are on the job, but the act requires employers to count hours worked if “the employer knows or has reason to believe that the work is being performed.”

State laws related to remote workers vary in a number of other ways, ranging from minimum wage requirements to payroll deductions. Income taxes vary by state. As a general rule, employers must withhold income tax according to the law of the location where the work was performed. However, in some states, the law differs.

The analysis can become further complicated in the case of remote workers who split their work time between home and office in two different states. Determining whether deductions are required for disability and paid family-leave insurance benefits can also prove tricky.

Employers should not forget remote employees when it comes to legally mandated training or required job notices. Several states require that employees receive annual or bi-annual sexual harassment training.

Remote employees who perform the same work as on-site employees are arguably entitled to be treated the same when it comes to the terms and conditions of employment. Companies should ensure that remote workers are being exposed to the same opportunities for training, mentoring and advancement as others to avoid claims of discrimination.

THE AGENCY ALTERNATIVE

A staffing agency may reduce a company’s costs and provide the solution to its short-term needs. However, don’t assume this solution will avoid liability for workplace issues.

Temporary workers are employees of the staffing agency, not the client company. However, a company may be deemed a “joint employer” of a temporary worker if the company exercises sufficient control over the terms and conditions of the temporary worker’s employment. This can result in the company assuming many legal obligations the company assumed were the responsibility of the staffing agency under wage-and-hour, harassment and discrimination laws.

Unfortunately, tests for determining joint-employer liability vary by statute and jurisdiction, creating confusion especially for multi-state employers.

For example, the test for determining a joint-employer relationship under the federal FLSA was just revised this year. It applies a four-factor balancing test that focuses on

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