Five Top Labor and Employment Issues to Watch in 2016

2015 was marked with legal developments that will fundamentally impact employment and franchise relationships. Five of the more significant labor and employment issues to watch in the coming year include joint employment, worker classification, wages and overtime pay, paid sick leave and background checks.

By Marlén Cortez Morris

The U.S. National Labor Relations Board created shockwaves in late August 2015 when it broadened the standard for determining whether two or more businesses are joint employers under federal labor law. Under the new standard, direct or actual control by each putative employer is no longer required to deem them joint employers. Instead, indirect control or even reserved authority to control “essential” conditions of employment will do. This includes control over personnel matters such as hiring, firing, discipline, supervision, direction and training, wages, hours and benefits, staffing, scheduling, and work assignments. And the control, whether exercised or reserved, can be found in the way employers use technology, tools, and resources.

While this standard applies only with respect to federal labor law matters, it impacts both unionized and non-union businesses. Even companies that have no employees of their own can be affected. What’s more, other federal agencies, including the Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, and the Department of Labor appear to be moving toward broadening the test they use to determine the existence of an employment relationship for purposes of workplace discrimination, harassment, safety and health, and wage and hour laws as well.  

Even though the NLRB’s new joint-employer standard is being challenged in the courts and through federal legislation, it remains to be seen whether it will survive, be reversed to its direct-control standard, or be modified. Businesses, unionized and non-unionized, franchise and non-franchise alike will therefore need to stay atop of new developments in this area in 2016 so that they can take appropriate steps to reduce the risk of joint- employment liability.  

Worker (Mis)Classification

The distinction between employee and independent contractor is an important one, and one to watch in 2016. For years, companies have used independent contractors instead of employees because of the various benefits that result from such treatment. These work arrangements provide flexibility and cost-savings because companies are not required to pay independent contractors minimum wages or overtime pay, provide them employee benefits, or incur payroll taxes on their behalf. In addition, independent contractors are expressly excluded from the protection of several labor and employment laws, including some anti-discrimination and workers’ compensation statutes. But misclassification of workers can be extremely costly, particularly now in light of heightened scrutiny about such arrangements in legislation and state and federal agency actions.

In July 2015, the DOL issued new guidance significantly expanding the definition of “employ” under federal wage and hour law, the Fair Labor Standards Act. Under the DOL’s new guidance, “most workers are employees,” not independent contractors. The focus of the inquiry will be on the “economic realities” of the working relationship. 

If a worker is “economically dependent” on the alleged employer (and most will be, according to the DOL), he will be deemed an employee for federal wage and hour law purposes. Only when the worker is truly in the business for himself or herself, will the worker be considered an independent contractor. 

This new guidance will certainly have a big impact on the way companies do business and lead to increased wage and hour litigation alleging that workers have been misclassified as independent contractors. Employers should carefully review how their independent contractor relationships are structured and documented to ensure proper classification. Franchisors should also examine their relationship with franchisees to ensure they aren’t exerting employer-like controls in written agreements, operations and training manuals, and operational requirements.

Minimum Wage and Overtime Pay Exemption Changes

For 2016, the DOL has also proposed changes to regulations that would significantly change which employees are exempt from the minimum wage and overtime provisions of the FLSA. The proposed change to the so-called FLSA’s “white collar” exemption rule, which covers executive, administrative, professional, outside sales, and computer workers, would more than double the salary threshold for the exemption to apply. It would raise the minimum salary from $23,660 annually or $455 per week to $50,440 annually or $970 per week. It would also increase the minimum salary from $100,000 to at least $122,148 for a highly compensated employee to be exempt. 

Based on DOL projections, the new regulations could eliminate exempt status for nearly 21.4 million employees. All employers will therefore be financially impacted by these changes, including those in the franchising industry. Hospitality and restaurant businesses, for example, generally rely on the executive and administrative exemptions for employees who are responsible for significant aspects of the business operations and for managers who supervise the employees.

The DOL expects to release the final rule in July 2016. Once issued, employers will have a mere 60 to 120 days to comply. It is therefore crucial for employers to not wait and take steps now to plan and prepare for these changes. Employers should evaluate the potential costs of these proposed changes and budget accordingly. They should also review their workforce to ensure that their employees are properly classified as exempt under the new regulations and to identify which employees currently classified as exempt no longer might be. This requires a complex analysis that should be done with legal counsel, as it goes beyond salary and requires a careful examination of the employees’ job duties. 

In addition, employers may consider options such as workforce adjustments and restructuring of positions to minimize potential overtime and ensure compliance with the new rules within budget, but again, working with experienced legal counsel will help avoid claims or minimize litigation exposure.  

Paid Sick Leave

Although federal law does not currently mandate that employers provide paid time off for illness to their employees, paid sick leave has become a growing movement at the state and local level. Four states, the District of Columbia, and over 20 localities currently require employers to provide employees with paid time off if the employee or his dependent becomes ill. It is expected that more jurisdictions will pass paid sick leave laws in 2016; therefore, this is another area that employers should monitor.

Background Checks: Ban the Box

Increasing numbers of states and municipalities are following the “ban the box” trend and adopting laws that prohibit employers from inquiring into a job applicant’s criminal history too early in the hiring process. In general, these laws remove questions about an applicant’s criminal history from the employer’s job application and delay the inquiry until later in the hiring process. Given this movement, employers should watch for developing laws and retool their hiring practices accordingly.

In the current legal landscape, businesses need to stay abreast of federal, state, and local developments impacting their employees and independent contractor arrangements. It is all the more important to periodically review handbooks, manuals, practices, and policies with legal counsel to ensure compliance and avoid, or at least minimize the risk of, litigation.

Marlén Cortez Morris is an attorney at Cheng Cohen LLC and represents franchisors on litigation and labor and employment matters.  Find her at fransocial.franchise.org.