By Cliff Ennico
Slowly but surely, the courts and government regulators are taking the stand that there is no middle ground between “employees” and “independent contractors.” If you are directing and controlling a person’s activities while they are working for you, that person is an “employee.” You must withhold federal and state income taxes from that person’s paycheck, and pay federal and state employment taxes on top of that. Period. No further discussion.
An “independent contractor” must have the ability to control when and how she does her work. You don’t have to withhold taxes from amounts you pay her, nor do you have to pay employment taxes on top of that. That is her responsibility. You can tell her you need something done by a particular date and time, but between now and then, she gets to decide when she works, how she works, and who she works for.
If you’re not sure whether someone is an employee or independent contractor, she is probably an employee.
Earlier this month, the National Labor Relations Board handed down a major ruling (www.nlrb.gov/news-outreach/news-story/board-issues-decision-browning-ferris-industries), that could upend the traditional arms-length relationship that has prevailed between corporate titans such as McDonald’s and its neighborhood fast-food franchises. And it comes as concerns are growing about a generation of new Internet-fueled business such as Uber and Lyft that depend heavily on independent contractors.
Typically, when you buy a franchise, there’s a clause in the franchise agreement saying that you (the “franchisee”) are an independent contractor of the franchise company (the “franchisor”). When you hire employees, they are your employees, not the franchisor’s employees.
Yet, at the same time, the franchise agreement requires you to comply with a host of regulations, often contained in an “operations manual” running to hundreds or even thousands of pages. As in the old Buffalo Springfield song, “step out of line, the men come and take you away.”
Your employees are your employees for legal and tax purposes, but the franchise company directs and controls what the employees wear, how they do their work, how often they can take bathroom or smoking breaks, what they must say when greeting customers, and so forth. You are legally responsible for these employees if something goes wrong, but someone else (using you as its mouthpiece) is telling them what to do.
Since the 1940s the NLRB has maintained that employees of “joint employers” – two companies that coordinate their activities in hiring, firing and managing workers – can bring lawsuits against either or both company for, well, just about anything employees can legally sue for. Discrimination, wrongful termination, sexual harassment, overtime pay, unionization, you name it – it’s not good to be a joint employer.
In its decision, the NLRB found that, regardless of their contractual relationship, two or more entities are joint employers of a single workforce if (1) they are both employers within the meaning of the law; and (2) they share or codetermine those matters governing the essential terms and conditions of employment. In evaluating whether an employer possesses sufficient control over employees to qualify as a joint employer, the Board said it will – among other factors — consider whether an employer has exercised control over terms and conditions of employment indirectly through an intermediary, or whether it has reserved the authority to do so.
While not specifically addressing franchises, the NLRB ruling is clearly designed to shake up relationships between franchisors and their franchisees. It is not difficult to imagine fast-food workers – many of whom work below prevailing wage rates in their communities – banding together to launch class action lawsuits not just against the owners of their particular franchise, but the national franchise operation as well.
In fact, 10 employees of a McDonald’s outlet in Virginia have sued the national franchise, alleging they were fired by the owner of the local franchise outlet on the basis of race, even though such discrimination by a franchisee (if it took place) would clearly have violated McDonald’s strict corporate policies against discrimination of any kind (www.wsj.com/articles/lawsuit-against-mcdonalds-to-test-nlrb-decision-on-franchisee-relationship-1421955168).
This lawsuit, and others like it, are bound to test the NLRB’s ruling, as well as a finding by NLRB’s general counsel earlier this year that McDonald’s could be treated as a “joint employer” with its franchisees in a series of worker complaints over employment conditions (www.nlrb.gov/news-outreach/news-story/nlrb-office-general-counsel-issues-consolidated-complaints-against).
You can bet the International Franchise Association and the large national franchises will be fighting these battles in court for at least the next few years. But however these cases are resolved, the handwriting is on the wall: the days of the so-called “contract employee” are numbered. If you have any in your business, it’s time to sort them out.
Some of these folks may fall into special categories (for example, “outside sales employees” may be exempt under the federal minimum wage and overtime law). But most won’t. You will have to make some tough choices. Talk to a good employment lawyer, start thinking about which of your “contractors” you can afford to lay off, get ready to add some of them to your payroll…and be prepared to pay a lot more for a Big Mac.
(Part 1 is here.)
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Cliff Ennico (email@example.com) is a syndicated columnist, author and host of the PBS television series “Money Hunt.” This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com. COPYRIGHT 2015 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC