Action by the National Labor Relations Board and the U.S. Department of Labor represent an existential threat to small and medium size security companies that continue to do business as usual. These actions cannot be ignored, but there may be a bright side.
by Michael Nossaman
Two government actions, in order of magnitude, are going to change the way business is done in the United States: the National Labor Relations Board ruling regarding joint-employer status, and the Department of Labor Wage and Hour Division Misclassification Initiative.
The greater purpose of these two actions is to raise the wages and benefits of workers, primarily those considered “vulnerable” low wage earners, but the additional practical effect is to promote collective bargaining and increasing tax revenue.
The NLRB ruling is the more troublesome threat to small and medium size security companies as it may serve to shut them out of contract opportunities, not only future but current contracts.
The NLRB and WHD using different means, arrived at the same end, resulting in the same effect: maneuver companies to classify the majority of workers as hourly employees working under collective bargaining agreements (CBA).
The NLRB Joint-Employer Ruling
The National Labor Relations Board (NLRB) is an independent federal agency authorized under the National Labor Relations Act (NLRA) “enacted in 1935 to protect the rights of employees and employers, to encourage collective bargaining, and to curtail certain private sector labor and management practices, which can harm the general welfare of workers, businesses and the U.S. economy.”
The NLRB enforces the act and has independent power to investigate and remedy unfair labor practices by employers and unions. The NLRB is comprised of five members appointed by the U.S. President. It also has a General Counsel, appointed by the President who, in effect, functions as a prosecutor. Administrative Law Judges, District Offices, and the board members issue NLRB rulings.
In brief, on August 27, 2015, the NLRB, in the Browning Ferris Industries/Leadpoint case ruled that if a client company exerts either direct or indirect control over a contractor’s employees or has the right to control those employees, then both companies are joint-employers of the contractor’s employees and each company is equally and jointly subject to the collective bargaining and other provisions of the NLRA that cover the contractor’s employees.
The bold emphasis above is added because, for the past 30 years, the client company had to exert direct or indirect control to trigger joint-employer liability. There was no liability attached to simply having the right to control. Now there is. That is what the recent NLRB ruling changed. That is a tectonic shift in interpretation of the Act.
This ruling could instantly chill the relationship between clients and their contractors. A company that has outsourced its security function to a private contractor could now be obligated to negotiate a collective bargaining agreement with the union that represents the contractor’s employees.
In addition, in the past, if the contractor was the target of union organizing effort, their client could simply terminate the contractor and hire a new company. Not so now, the client cannot walk away from joint-employer inclusion if the right to control ever existed.
The NLRB ruled that Browning Ferris Industries (BFI), a recycling company, is a joint-employer of the employees of Leadpoint, a contractor hired to work at sorting materials in a BFI processing plant.
Among the list of reasons the NLRB cited in ruling that BFI was a joint-employer was that BFI negotiated hourly rates for Leadpoint employees and Leadpoint profit margin, that BFI dictated where and when Leadpoint employees would work, what work they would do, and how they would do it. BFI also engaged in referring specific employees for disciplinary action. The list goes on but the point is striking; does this read similar to a contract security agreement?
The effect of this ruling is that Browning Ferris is now compelled to negotiate, along with Leadpoint, a CBA with the Sanitary Truck Drivers and Helpers Local 350, International Brotherhood of Teamsters.
The WHD Misclassification Initiative
The Wage and Hour Division (WHD) of the U.S. Department of Labor (DOL) enforces the Fair Labor Standards Act (FLSA) enacted in 1938 that “establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in federal, state, and local governments.”
Misclassification refers to the practice, intentional or unintentional, of improperly classifying certain employees as exempt from overtime pay or as independent contractors (ICs). The principal advantages of using ICs is to avoid hiring full-time employees, paying overtime wages, employment taxes, and providing benefits.
The WHD Misclassification Initiative pre-dates the NLRB joint-employer ruling by several years. It originated in the early years of the Obama administration when, in 2009, Vice-President Joe Biden took charge of the “Middle-Class Task Force,” ostensibly to raise the living standard of middle-class Americans.
About the same time as the Task Force initiative got going, the IRS Tax Inspector General for Tax Administration (TIGTA) revealed that there was a Tax Gap, the difference between what American workers earned and the amount of taxes they paid on their earnings. The TIGTA could not say how large the tax gap was other than he thought it was big, and in the billions of dollars. That prompted a study of 6,000 businesses with the hope of getting some better numbers about the actual size of the gap.
The WHD did not wait for the TIGTA to complete the study before springing into action. It knew that part of the tax gap resulted from the growing use of ICs and other workers engaged in what are commonly referred to as “on demand,” or “contingent” work, and the “gig economy.”
Congress tried to pass laws to stop supposed IC misclassification but failed. Not deterred, the WHD went on the investigatory and enforcement warpath. To the WHD, new laws would make it easier to enforce wage and hour rules, but it already had plenty of regulatory tools and power to bring wage and hour violators to bear. Moreover, as illustrated later, the WHD has the authority to interpret the rules and regulations needed to beat down the best defenses used by companies that employ ICs.
Companies that misclassify employees as ICs face substantial fines and penalties, payment of overtime and back wages, taxes on those wages, and certain other employee benefits payments such as worker compensation, unemployment taxes, health care premiums and expenses, and more, such as being barred from federal contracts. Additionally, workers previously employed as ICs must thereafter, be treated as employees in the jobs that resulted in the enforcement action. That rule would apply to current workers and future hires.
Moreover, just as in the case of the NLRB, the WHD can attach a joint-employer designation to client companies in wage and hour cases. If that happens in a WHD enforcement action, the client is also on the hook for all the financial liability that resulted from a contractor’s wage and hour violation.
If that were not enough exposure to cause major financial and employment problems, the DOL and the Internal Revenue Service (IRS) along with more than 20 of the states have written agreements to share information. Violators face as much risk from state labor agencies as they do from federal agencies. An action by one agency is likely to trigger an action from others. Employers would be wise also to assume that the WHD and the NLRB are also talking to each other and sharing notes. Remember too, part of the NLRB mission is to “encourage” collective bargaining, so it is a safe bet that the NLRB is sharing information with unions.
The WHD, on July 15, 2015, issued a new Administrator’s Interpretation of the six-point “economic realities” test it uses to determine IC classification, the result of which makes it harder to claim IC status. While not a change in the law, the more expansive interpretation will make it easier for the WHD to bring an enforcement action, and will have substantial weight with courts that, heretofore, have given considerable latitude to companies in IC classification cases that go that far. This new interpretation will result in more WHD investigations and enforcement, litigation, and likely, private class action lawsuits.
Similar Strategy and Tactics
The NLRB and WHD are separate entities, but their missions overlap.
To understand the mission it helps to examine the strategy and tactics the agencies employ to accomplish their respective objectives. The best way to do that is through the lens of the current WHD Administrator, Dr. David Weil.
On leave of absence from Boston University, Weil is a strong advocate of worker rights and collective bargaining agreements. He wields enormous administrative power and prefers to forgo the law making process in favor of using regulatory enforcement and litigation.
Based on his writings and statements, Weil believes that most workers are employees and deserve the protection of collective bargaining agreements. He has the administrative power to pursue those goals and there is little in the short term that can be done to stop him. To overrule him requires either court action or legislation, neither of which would be quick. He knows this and is aggressively pursuing what he terms “strategic enforcement” of regulations and litigation to bring companies into compliance with wage and hour rules as he interprets them, and is not afraid to interpret the rules as he sees fit, something he has the authority to do.
His strategy of enforcement and litigation is to force all companies to comply with his view of the rules. In short, he means to target industries that are most likely in his view, abusing workers by outsourcing non-core functions such as security to other companies that hire low wage “vulnerable” workers.
He believes that outsourcing non-core business functions depresses wages by creating a “dive to the bottom” competitive pricing environment. This in turn forces contractors – desperate to compete and survive – to violate wage and hour rules, particularly overtime, and IC and employee misclassification.
A Tangled Web
Knowing that they lack the resources to pursue enforcement violations of labor practices and wage and hour rules from among the more than 7 million American businesses operating today that are subject to FLSA enforcement, the WHD and NLRB are targeting what Weil calls “industry webs.” Here is how he describes webs in practical terms.
“We need to create ripple effects that impact compliance far beyond the workplaces where we physically conduct investigations, or the organizations to which we provide outreach directly. We need to continue to find ways to make our investigation of one employer resonate throughout that particular sector and influence the behaviors of employers across that entire industry, to promote compliance across networks of business organizations.”
“We’re identifying the contracting stream, or supply chains, so those at the top of the chain will evaluate the compliance practices of those below them and consider whether it’s worth their own good name and possibly their own bottom line to utilize the services of subcontractors or suppliers who skirt the law.”
One such web is the franchise industry and McDonald’s Restaurants is a prime target. Since 2012, the NLRB has been aggressively pursuing collective bargaining action against McDonald’s in over 300 cases. The joint-employer ruling strengthens the hand of unions to go after individual franchise owners and force McDonald’s corporate into collective bargaining with potentially multiple unions.
The web strategy also applies to any multi-state company with contracts for security services. If a client company contracts for security with a company that is a union shop or is the target of a union organizing campaign, the client could be forced to negotiate a CBA if the NLRB rules that they are a joint-employer. To repeat, the NLRB ruling states that just the right to control is enough to establish joint-employer status.
Another industry web target is single large companies in a particular industry that use similar outsourced services such as contract security. If the NLRB can pick off one or two big companies that contract to buy security services and force them into CBAs, legions of other large companies in the same industry who also contract for security will fall in line.
This strategy will work in reverse too; go after contract security companies. This is the tactic used in the Browning Ferris case that resulted in the NLRB right to control ruling. The NLRB went after Leadpoint, the company that supplied labor services to BFI, and snared BFI.
The big security companies are already on the NLRB and WHD target lists by virtue of their size and interstate domain; both the NLRB and WHD specifically mention the contract security industry when referring to industries with a high percentage of vulnerable workers. The contract security industry is on the WHD targeted industry list for wage and hour violations, and employee and IC misclassification. Low wage industries draw special attention of the NLRB and the WHD. In addition, the WHD has a long and successful history of applying the joint-employer designation.
Small and medium-size security companies are also targets, even as sub-contractors to large security companies because the joint-employer path goes upstream. Start with small company security sub-contractor, capture large security contracting company, snare large company client. All it takes is a union organizing effort or a single wage and hour violation. Incidentally, most claims and complaints that precipitate NLRB and WHD action come from employees and independent contractors.
The Effect on Client Companies
Clients are not going to risk exposure to wage and hour enforcement actions and union organizing efforts caused by their security contractors. The NLRB joint-employer ruling also makes it harder, if not impossible, for client companies to walk away after issues arise with their contractors, so preemptive action will more likely be their response. If there is even a whiff of potential liability because of the way their security contractor operates or the language in their service contract, clients will sever ties and hire companies that are squeaky clean, or bring security in-house. In either case, security companies that play fast and loose with labor practices or wage and hour rules are now at greater risk of losing clients or being shut out of contract bidding.
However, government and union action is not the only threat to both contracting companies and contractors. The NLRB ruling is a boon to trial lawyers bringing class action lawsuits. Joint employment third party liability has always been a risk related to employee wage and hour violations and misclassification, and the NLRB joint-employer ruling has further incentivized legal action because it further codifies the right to control principle. This gives class action lawyers one more tool they can use to snare deep pocket client in the same web of financial exposure as the smaller contractor who committed the original wage and hour sin.
Moreover, it lowers the threshold for the size of the company targeted for employee lawsuits. Obviously, the more employees a security company has the greater the target because of the bigger payoff. The NLRB ruling makes even small companies potential targets for class action lawsuits because it exposes two pockets, not just one.
It bears repeating, client companies will not wait to take action in the face of potential government enforcement, union organizing, wage and hour penalties and fines, class-action lawsuits, and brand damage.
An Action Plan
The NLRB ruling has not gotten much attention outside the business press and the radar of large companies…yet. If your client list includes large companies, they are aware of it and are likely reviewing and analyzing their existing contractor agreements and arrangements. It is obvious that the WHD is also on the warpath and your clients are aware of that too and preparing a defense.
NLRB and WHD action plans on this front are nearly the same: target industry webs that employ low-wage workers, search for labor practice and wage and hour violations, apply the joint-employer rule, and publicize enforcement success to bring whole industries in to compliance.
Just as the NLRB and the WHD method of attack is the same; strategic enforcement, your best defense against either of them is the same; avoidance.
To avoid NLRB problems with organized labor efforts that might involve your clients, write and implement service contract terms and polices that shield clients from joint-employer liability. If some of your workers petition for union representation and collective bargaining, you may or may not succeed in fending off their attempt but win or lose; you will have shielded your client from involvement and are more likely to keep their business.
To avoid violating WHD rules that cover your employees, clean up your act. Among other things, make sure that you are paying them properly for all time worked, especially overtime. You will need polices that cover a long list of issues. Important on that list is a policy for lunchtime and breaks, and for equipment and apparel employees are required to supply. These may seem trivial items but there have been labor and wage cases brought specifically over break times and shoe allowances. Provide employees with all required health and welfare benefits. Comply with all tests and limits covering exempt salaried employees.
Make certain that you document all employee policies in writing, apply them consistently, and keep detailed records. The burden of proof of compliance is on the employer. WHD Administrator Weil once recommended mandating employers to provide employees with electronic time recording devices so they could record their hours worked in such a way that employers could not alter the results. Some have accused Weil of being anti-business. On September 28, 2015, the DOL announced that it, “has created a free mobile app for employees to independently capture and track the hours they work and determine the wages they are owed.”
If you employ independent contractors, the burden of proof that they are not employees is a heavy load and too, is entirely on the employer. A misclassification enforcement action will put you in touch with the DOL, the IRS, similar state agencies, and maybe even now, the NLRB. Moreover, enforcement by one of these agencies will attract the others.
Regardless of whether it pertains to the NLRB or a WHD IC Misclassification, the way to protect yourself and your clients in an IC Misclassification case is to have an ironclad agreement, compliant policies, consistent implementation, and thorough recordkeeping.
A casual agreement and proof of payment alone are insufficient. The DOL, the IRS, and state agencies do not all use the same test for classification. The DOL uses an “economic realities” test. The IRS relies on the “common law control” test. State agencies use similar tests but they are all different and unique.
Richard J. Reibstein, a partner in the Labor and Employment Practice Group of the Pepper Hamilton, LLP law firm, and renowned expert in labor law and employee classification recommends that employers re-structure, re-document, and re-implement independent contractor agreements in compliance with current classification rules. A critical element of implementation, he emphasizes, is the need for employers to constantly monitor and document implementation to ensure that they and their contractors adhere to their IC agreements…to the letter. Mr. Reibstein and his colleagues Lisa B. Petkun and Andrew J. Rudolph reports and analyzes misclassification news and rulings in their blog, Independent Contractor Compliance.
Constructing independent contractor agreements is a highly specialized area of law and requires expertise beyond what a corporate attorney can offer. A battalion of corporate lawyers and outside counsel failed to protect FedEx from paying a $326 million dollar settlement for misclassifying drivers as ICs. FedEx is not the only Fortune 500 Company to suffer the same consequences of misclassification. There are numerous cases of security companies paying hundreds of thousands of dollars in back taxes, fines, and penalties for misclassifying workers as ICs hired to augment their existing workforce or for specialized security services. Today, employing ICs requires the skill, attention to detail, and constant monitoring that is akin to navigating a minefield.
David Weil, in his July 15, 2015 “Administrator’s Interpretation” of the economic realities test of independent contractor classification said, “Thus, applying the economic realities test in view of the expansive definition of ‘employ’ under the Act [Fair Labor Standards Act (FLSA)], most workers are employees under the FLSA.” He stopped short of adding, “…and should be covered by a collective bargaining agreement,” but clearly, based on all his previous work and writing, he believes that would be desirable.
Furthermore, Weil’s tactical plan includes an aggressive public relations campaign to publicize WHD enforcement successes. He is very clear about his motive, method, and outcome.
When we conclude significant cases, we publicize the results through traditional and digital media. Publicizing wage and hour violations is an effective way to educate other employers about their responsibilities and encourage compliance.”
As an example, below is an edited excerpt of an actual WHD News Release citing the penalties imposed on company that had misclassified employees as independent contractors.
“The employer will pay back wages, liquidated damages (an amount equal to the back wages), and civil monetary damages, and properly classify the subject workers as employees in the future.
In addition, the employer will take other concrete proactive steps to ensure that misclassification of its workforce does not occur again. These steps include hiring a third-party monitor to ensure compliance, and conducting regular training of its employees and sub-contractors regarding labor practices under the FLSA.
Finally, the company agrees to implement an education campaign within its industry to promote awareness of and compliance with FLSA rules. This campaign will include making presentations to industry associations addressing the importance of properly classifying and paying workers as employees and identify the costs that workers, taxpayers and law-abiding employers, due to resulting unfair completion, endure from unlawful misclassification of employees as independent contractors.”
A victory for workers will be celebrated and perhaps even spawn a new movement: “Workers Pay Matters!” or “Workers Unite!”
If you do not know what the IRS and WHD IC rules are, you must learn. FedEx and other Fortune 500’s thought they knew. They did not and they paid big bucks for their mistakes. They can afford it. Do not attempt to take on the WHD or NLRB; the odds favor them winning and the cost of you winning can run into the millions of dollars.
The takeaway is that employers need to codify work and pay polices that are WHD and NLRB compliant…and live by them! It begins with contracts and ends with implementing them.
Communicate and collaborate with your clients. If the WHD or NLRB comes after you and rules that your client is a joint-employer, you are going to be partners anyway, so you might as well start working together now to avoid the problem. If you are a high-road operator, performing ethically as expected, explain to your client what you have done, what you are doing, and what you are going to do further, in addition to providing highly professional security services, to protect them from costly labor law violations, union organizing, and class action lawsuits.
The Bright Side
A potential benefit from what the NLRB and WHD are doing is that the security industry contracting model will evolve in ways that will help security contractors, their employees and sub-contractors, and their clients alike.
The Wage Rate/Bill Rate model for security services is the single biggest cause of low wages and low profit margin in the contract security industry, and is a touchpoint for government agency intervention in wage and hour matters and labor practices. It is an outdated services compensation model for this industry and must be replaced with one that is aligned with economic reality.
Client companies love this model because security is not their core business, and anything they do that is not core business is an expense that should be acquired from the lowest bidder. That attitude is a drag on the security industry and frankly, can put clients at greater risk. It needs to be changed. The security industry over the past few decades has done a marvelous job of improving both the quality of services delivered and its reputation. Moreover, those accomplishments were achieved within the industry without government intervention or mandate.
The next goal for the industry is to raise the level of compensation for security services, at all levels, and for every function and specialty. A new services pricing model is a way to achieve that goal.
Other professions are similarly moving away from the billable hour model with promising results. For example, accountants long steeped in the traditional hourly fee arrangement are transitioning to different fee for service models that are based on outcome objectives. It is axiomatic, in labor-intensive work such as accounting and security, labor cost is the single biggest item, but that does not mean that the Wage Rate/Bill Rate model is the only viable model.
The industry itself has elevated its professionalism and reputation yet it has abdicated on the matters of compensation and work performed, and allows its customers to dictate those terms.
Reversing years of the commonly accepted Wage Rate/Bill Rate way of doing business is a mammoth undertaking. The model is entrenched in the industry mainly because security practitioners have done little to resist and overcome the generally accepted view that professional security services is a commodity much the same as landscaping and janitorial services.
What that implies is that security professionals will need to take on the task of changing attitudes among consumers and taking back control of compensation and service delivery. The alternative is to do nothing and rely on the government and unions to take charge and make changes by force.
Finally, there are gatekeepers and “rent-takers” that benefit from the status quo and they will resist any effort to change. Nevertheless, it is a battle that can be won. It has to be, otherwise, the future is simply an industry that continues to operate on razor thin margins, is dominated by large players, cuts corners to survive, and attracts the wrath of government regulators, class action lawyers, and union organizers.
Michael Nossaman is the founder of the Protective Security Council.
References and Resources
National Labor Relations Board
National Labor Relations Act (NLRA)
Browning Ferris Industries ruling News Release
Browning Ferris Industries ruling
Wage and Hour Division (WHD)
Fair Labor Standards Act (FLSA)
WHD Misclassification Initiative
Middle Class Task Force
WHD Administrator’s Interpretation
Strategic Enforcement statement by WHD Administrator
The Fissured Workplace, statement by WHD Administrator
McDonald’s Restaurants, NLRB Fact Sheet
Free Timesheet App, DOL announcement
Independent Compliance Blog
WHD New Release announcing misclassification penalty agreement http://www.dol.gov/whd/media/press/whdpressVB3.asp?pressdoc=Western/20140519.xml
According to the U.S. Bureau of Labor Statistics (BLS) there are about 27 million U.S. businesses operating today, the majority of which are Sole Proprietorships with no employees. Approximately 7.3 million businesses with employees are subject to the laws enforced by the U.S DOL Wage and Hour Division under the FLSA. Those laws cover 135 million American workers.