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Employment Status: Who Ever Thought It Could Be So Confusing to Determine?

November 26, 2020

By Michael Burns, courtesy of SBAM Approved Partner ASE

Both courts as well as state and federal agencies struggle with what the correct definition of employer and employee is depending on the situation they are asked to untangle.  For years federal agencies within the U.S. Department of Labor (DOL) – Wage and Hour, NLRB, and OSHA – have wrestled with whether two businesses that use the same worker are in fact both the worker’s employer.

If they both are determined to be the employer, it’s referred to as joint employment. Keep in mind there are two kinds of joint employers. One is called horizontal and the other is called vertical. Horizontal joint employment is typically found when one worker works for two business entities with common ownership or control. Vertical joint employers are where one business hires another business to do work for them. Joint employment situations typically revolve around determining whether one or both businesses are liable for pay, benefits, and even mandatory benefits such as workers compensation and unemployment compensation insurances.

As for who is an employee, Michigan’s appeals court recently wrestled with the question of whether a worker was an employee even though engaged with a single employer for years. However, the employer, not considering the worker an employee, failed to obtain workers compensation insurance.  Coverage was unavailable when that employee injured themselves on the job. Was the worker an employee or in fact a separate business engaged to provide services?

For most of us, determining employment status is as easy as referencing a pay stub. However, as the “gig” economy continues to roll along, even though the services being performed between two parties is clearly agreed to, when circumstances arise such as non-payment for those services or loss of income due to being injured on the job, suddenly the question of employment is not very clear. But it is very important.

As said above, courts and state and federal agencies struggle with the definition of employer and employee, but not because there is no “definition” or way to do so. It is often because there are too many definitions and tests available.

ASE has been following the issue of both joint employment and independent contractor (IC) status for quite some time. Just last week ASE’s EPTW looked at California’s new state independent contractor ABC test. In September, the U.S. Department of Labor rolled out proposed rules defining independent contractor vs. employee status for Fair Labor Standards Act (FLSA) compliance.

Though these tests sought further clarity to which of two engaged employers should be considered the employer, these newly proposed DOL rules were challenged in federal court.  As evidence of how difficult it is to move toward a more singular and simpler standardized test, the Court struck down parts of that rule. The Court found the DOL was being arbitrary and capricious in issuing these new rules. The rules sought to simplify their definition outlined four test criteria. Does the employer:

  1. Hire and fire the employee?
  2. Supervise and control the employee’s work schedule or conditions of employment to a substantial degree?
  3. Determine rate and method of pay?
  4. Maintain the employee’s employment records?

These tests are referred to as “control based” tests and are used to distinguish the primary employer when more than one business has engaged the worker. This recent federal court ruling is being appealed.

On the employee vs. IC status side of this question, last week the Michigan Appeals court looked at whether a bartender was really an employee or not. At stake was whether the bartender could get workers’ compensation benefits due to an injury as an employee or alternatively have to sue the business under the bar’s liability insurance as a “guest worker.” Not as employee, but as an independent contractor. The Court had to determine the correct employment test to apply. The Plaintiff argued for a test used by the federal Sixth Circuit Court of Appeals that used a three-part test vs. the Defendant’s assertion that the Michigan Workers’ Compensation Act required the use of the IRS’s 20-factor test for determining employment or contract based relationship. More tests to choose from…

Interestingly, the Michigan Appeals Court studied the relationship of the bartender to the bar (17 yrs. as a part-time employee, being paid under the table, and also being explicitly told by her owner-supervisor she was not an employee). In this case, the Court latched onto to the fact that the worker in fact held other bartending gigs and sought out other work as a bartender. To this Court, this fact was dispositive of the true business-worker relationship in this case. Because this person held themselves as a bartender for hire, in this Court’s opinion, the court ruled the worker was in fact a separate business. Therefore, the bartender could sue the employer under its premise’s liability insurance rather than the limited benefit amount she could receive under the state’s workers’ compensation system.

One can see the complexity and confusion inherent with the continued splitting and proliferation of differing employer-employee tests. Despite efforts to simplify and narrow the number of tests in play, courts and regulatory agencies continue in the other direction. 

Employers are advised to not enter into special work arrangements whereby the issue of employer, contractor, and worker are not clearly agreed to and documented. If workers are on site that are not formally employed (W-2, mandated benefits, recordkeeping) then a service agreement or contract for work should be in place between the two parties.

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