Businesses today must be innovative, creative, and nimble. Competition is fierce in our fast-paced and technology-driven world, which naturally causes companies to look for ways to cut costs and thereby increase profits. It comes as no surprise, then, that many businesses relegate certain tasks to independent contractors. It’s a no-brainer, right? You can get the same service for less money and avoid the administrative burdens that come with employing an employee. So where do some companies go wrong?
A recent case serves as a good reminder about the potential risks. As the Court of Appeals for the Seventh Circuit stated in Frey v. Hotel Coleman, it has long been the law that an employee can have more than one employer. Think about that for a moment. The laws and ordinances that prohibit employment discrimination protect an “employee” against discrimination by his or her “employer.” As the Frey case demonstrates, the entity that pays the employee’s wages is very likely the employer, but another entity that actually controls the employee’s work can be the employer, too. That means the employee who alleges he or she has been discriminated against or harassed in some illegal manner at work can pursue the claim against both entities in a charge and, later, a lawsuit.
In the Frey case, the hotel owner paid the wages of the hotel staff, including Ms. Frey, but it paid another company, Vaughn Hospitality, to handle the management of the hotel’s operations. In managing the hotel, Vaughn Hospitality hired and terminated staff; enforced employment rules and policies; set pay rates and benefits; determined work schedules; and supervised, trained, and evaluated staff. In addition, the staff’s work was not specialized in any way, nor was it of limited duration. When Ms. Frey filed a lawsuit alleging her supervisor sexually harassed her, she named both the hotel’s owner and Vaughn Hospitality as defendants.
The Court of Appeals used the “economic realities” test to determine whether Vaughn Hospitality employed Ms. Frey. Under that test, courts examine: (1) who controls the employee’s work; (2) the nature of the employee’s job; (3) who pays workplace and operation costs; (4) the method of payment and benefits; and (5) the job’s duration. As the Court stated, “the test is a balancing one with different weights added to each side of the scale—the heaviest of which is the degree of control.” While the Court did not determine whether Vaughn qualified as an “employer” under the economic realities test (it sent the matter back to the lower court for that decision), it surmised that, given how much control Vaughn exclusively exercised over both Ms. Frey’s work and her working conditions, Vaughn likely employed Ms. Frey.
What lessons must we take from the Frey case? Perhaps the single most important lesson is we must not assume that the entity who pays wages and benefits is the sole employer. To be sure, payment of wages and benefits to the individual strongly indicates an employment relationship, but that does not end the inquiry. If all or many of the other signs of an employment relationship reside with another entity, that entity may be jointly liable for workplace discrimination or harassment. Other employment-related issues could crop up, such as employment tax withholding and reporting, worker’s compensation, unemployment compensation, immigration reporting, workplace safety, and wage payment obligations—all requirements that befall an “employer.”
If your company is exploring alternatives to traditional employment, be mindful of the economic realities test when you negotiate the structure of the services to be provided. If your company has already entered into alternative arrangements for services and you are concerned about whether the arrangements place the company at risk for employment-related liability, consider consulting legal counsel to obtain an analysis of your situation and, if needed, advice regarding whether changes can be made to best position the company to defend against employment-related legal claims.
Germaine Winnick Willett is a member of Ice Miller’s Labor, Employment, and Immigration Group. She and Ice Miller’s other labor and employment attorneys assist employers faced with employment discrimination, retaliation, wage and hour, contract, and other employment-related issues, provide advice and counsel regarding employer investigations, and conduct on-site training. For additional information, contact Germaine at (317) 236-5993 or email@example.com or any member of Ice Miller’s Labor, Employment, and Immigration Group.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.