A Reminder for Retailers: Risks Associated With Hiring Third-Party Workers

As the retail sector grapples with the many challenges of a perpetually evolving economy and an increasingly mobile, independent, and dynamic workforce, it has become common practice for retailers to engage third parties to provide specialized, non-core services. Whether engaged through staffing agencies or “traditional” subcontractors, third parties provide security, cleaning, and maintenance services to retail establishments. Of course, this phenomenon is not limited to retailers: U.S. businesses alone now engage approximately 2.7 million temporary and staffing agency workers—and that figure does not include the many workers engaged through other subcontracted service providers.

For some time, employers had been bracing for the National Labor Relations Board’s recent decision regarding its new, broader standard for “joint employer” status. Because the Board’s decision appears to be about as far off the mark as business groups and management side representatives had feared, it’s a good time to remind retailers of just a few of the consequences of the joint employer doctrine to consider when engaging third-party contractors.

Joint Employer Liability Under the Fair Labor Standards Act

When a retail employer is found to be the joint employer of a worker (together with that worker’s staffing agency or traditional employer), the retailer will become liable for wages and overtime under the Fair Labor Standards Act (FLSA), together with liquidated damages and the worker’s attorneys’ fees (in the event of wage and hour litigation). The FLSA defines “employer” broadly, and the various federal circuits have looked to a number of factors to determine whether the “economic realities” of a party’s relationship with a worker is indicative of joint employment. Most courts have considered at least some version of the following four factors in what is always a fact-intensive determination:

1. whether the alleged joint employer retained hiring and firing authority over the subject worker;
2. whether the employer supervised the worker, controlled work schedules, and controlled other terms and conditions of employment;
3. whether the employer set rates of pay and the manner of payment; and
4. whether the employer maintained employment records, including records of work hours.

Uncertain that the four-factor “formal control” analysis (originally set forth more than 30 years ago) will always suffice to determine an employer’s status under the FLSA’s broad definition, some courts have concluded that an entity may still be deemed a joint employer even where formal control does not exist, so long as the entity exerts “functional control” over the worker. In determining whether functional control exists, courts have considered nonexclusive factors, including:

1. whether the worker used the alleged joint employer’s premises and equipment;
2. whether the worker performed a function integral to the alleged joint employer’s business;
3. whether the relationship between the alleged joint employer and the agency/subcontractor could pass to another entity without material changes to the worker’s work;
4. the degree of supervision of the worker exhibited by the alleged joint employer;
5. whether the alleged joint employer screened workers for qualifications; and
6. whether the worker performed services predominantly or exclusively for the alleged joint employer.

Plaintiffs’ lawyers will inevitably seek to ride the wave of current legislative, NLRB, and enforcement actions broadening, the joint employment standard (especially in class and collective actions, where financial incentives to do so are high.) Thus, identifying and resolving potential areas of weakness in retailers’ engagement of third-party services is an item that should be high on every retailer’s to-do list.

Joint Employment Under Title VII of the Civil Rights Act of 1964

Historically, joint employment concerns have been less prominent in the discrimination and harassment contexts. Indeed, the question of whether “joint employer” liability is cognizable under Title VII has been addressed squarely by fewer than half of the federal circuit courts of appeal. Nonetheless, those courts that have considered the issue have typically permitted those who have brought claims under Title VII to pursue a theory of joint employer liability under one of three tests that have been developed. Moreover, the U.S. Equal Opportunity Employment Commission (EEOC) formally advocated for the application of the federal discrimination laws to employees from staffing agencies in its enforcement guidelines published in 1997.

The first is the control test, which is essentially the same framework used to analyze joint employment under the FLSA. The second is the economic realities test, which analyzes the degree to which the worker depends upon the alleged joint employer for work and pay, and is aimed at upending arrangements that shield an entity from liability through corporate form, where that entity is nonetheless the party on which the worker relies for his or her livelihood. A third, “hybrid” test, seeks to bridge the other two tests in making the fact-specific inquiry called for under Title VII. This hybrid test was explicitly set out earlier this year in Butler v. Drive Automotive Industries of America, Inc., No. 14-1348 (July 15, 2015), in which the Fourth Circuit Court of Appeals held that nine factors should be considered (or modified, as to fit specific industries) as best capturing “the reality of modern employment” in analyzing whether the recipient of a worker’s services is, in fact, a joint employer:

1. the authority to hire and fire;
2. day-to-day supervision, including discipline;
3. the furnishing of tools, equipment, and workplace;
4. possession of and responsibility for employee records, including payroll, insurance, and taxes;
5. duration of service by the worker;
6. the provision of formal or informal training;
7. the similarity of the prescribed duties to those performed by the entity’s regular employees;
8. whether the worker performs services exclusively for the entity; and
9. the intent of the worker and the entity regarding the nature of the relationship.

While the court did not consider any of those factors to be dispositive, it did instruct the lower courts that the first three factors were the most important and most useful in determining ultimate control, practical control, and similarity to other employees.

Although the Title VII context for joint employer liability does not present the same scope of potential liability as the FLSA, it is nonetheless important for retailers to understand their potential responsibility for discrimination claims brought by contracted workers, not only in structuring work arrangements with an awareness of the factors described immediately above, but also in determining how to train employees and managers in connection with Title VII and, of course, applicable, similar local laws. Given the rising prominence of the joint employer doctrine in the NLRB context, retailers can expect an increase in the attempted use of the doctrine in Title VII and FLSA cases (and similar state laws).