Liability for employees’ employment law-related claims typically extends only to the “employer.” A recent trend is to expand the definition of “employer” to otherwise separate organizations. Employers should be aware of this trend, as it could result in unanticipated financial responsibility for a variety of employment law claims.

There are a variety of circumstances under which multiple employers work together in one business. An employer may subcontract part of its work to another business because of expertise or economies of scale. A factory may use a staffing agency to ensure a ready supply of production workers.

“Joint Employer” Liability

The courts, as well as agencies such as the National Labor Relations Board (NLRB), have begun requiring companies to defend against claims brought by other businesses’ workers. The reasons for expanding responsibility vary, depending on the law and government entity involved. The current NLRB, for example, is interested in fashioning a body of labor law that is hospitable to union organizing efforts and labor rights. In civil litigation such as discrimination lawsuits, more defendants mean greater likelihood of a deep pocket.

The expansion of liability is based on the amount of control non-employer companies could potentially exercise over vendors’ and other third parties’ workers. For example, the NLRB in its August 2015 Browning-Ferris Industries decision declared that a company may be jointly responsible for any labor-related misconduct by a vendor, depending upon how much control the company potentially could exercise over the vendor’s employees.

The Board’s decision involved a company that subcontracted some of its factory work to another company. Abandoning a 30-year line of precedent to create the new standard, the Board will more readily find joint employer status based on the stranger company’s retaining the power to influence hiring decisions, affect the subcontractor’s compensation scale, control the work flow, and other aspects of the work relationship. Under the previous standard, the focus was on proof that the stranger company actually exercised control over the third party’s employees. That is because some indicia of “potential’ control naturally would occur in any business in which one company brought another one into its facility.

Although this new decision concerned vendors, the Board may apply it to other business-to-business relationships in future cases. The NLRB’s decision will affect the ease with which unions may organize joint employers, as well as joint employers’ responsibility for unfair labor practices.

The trend is not limited to the union setting, however. The California Supreme Court also focused on mere potential control in its 2014 decision inPatterson v. Domino’s Pizza, LLC. There, the plaintiff did not convince the Court that franchisor Domino’s should be responsible for sexual harassment occurring at one of its franchisee’s businesses. However, the Court noted that “a franchisor will be liable if it has retained or assumed the right of general control over the relevant day-to-day operations at its franchised locations” with respect to employment matters such as hiring, discipline, termination, and even anti-discrimination or harassment training and policies. Franchisors must carefully avoid becoming involved in franchisees’ personnel decisions.

Parent-Subsidiary Liability

There similarly has been a willingness to expand liability to parent corporations for subsidiaries’ legal issues. Parent and subsidiary corporations are presumed separate under existing law. However, a parent may be liable for subsidiary misconduct if there is sufficient intermingling of operations and personnel, or evidence that the parent was using the subsidiary to evade liability.

The accepted “integrated enterprise” test includes factors such as interrelation of operations, common management, centralized control of labor relations and common ownership. This standard has long applied to union-management, discrimination, wage-hour, and more areas of federal employment law. Even a California court applied the test to a parent-subsidiary relationship in Laird v. Capital

Cities/Abc.

But in Castaneda v. Ensign Group, Inc., a California Court of Appeal refused to apply the integrated enterprise in a wage-hour case. The court emphasized Ensign’s ownership of its subsidiary, noting “a trier of fact could infer this evidence refutes Ensign’s claims of lack of control and responsibility.” The court found other evidence of Ensign’s control over its subsidiary as well. But common ownership was insufficient under prior law to confer liability on a parent.

How Much Control Is Too Much?

For parent-subsidiary relationships, when the parent centrally administers subsidiaries’ human resources matters, the courts and agencies are far more likely to hold a parent liable for subsidiaries’ employees’ claims. Parent management’s day-to-day involvement with the subsidiary’s operations will be significant. The analysis is fact specific and will focus on evidence of an “arm’s length” relationship. Therefore, accounting for inter-company transactions will be important as well.

Regarding “joint employment” between unrelated companies, contracting companies will have to analyze how much “potential” control they retain over the employees of the other companies with whom they are doing business. Retaining the power to influence basic employment terms such as the power to approve hires, to set wage rates, require or demand the removal of unsatisfactory workers are the type of potential control that could result in joint employment.

Those companies seeking to avoid joint-employment liability should draft agreements to focus on the outcome of the work, rather than the employees who are performing it. Instead of specifying the wage rates a subcontractor will pay its workers, the fees must be calculated a different way.

Contracting entitles should anticipate the possibility that a plaintiff will claim a joint employer relationship. The agreement should clearly allocate responsibility for insurance, indemnification, legal fees, and other matters related to the sharing of the burdens of claims should they arise. It may be necessary to ensure contracting entities’ human resources practices are lawful throughout the duration of the contract.

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