Beware the Employment Law Pitfalls of Partnering

A manufacturer decides to outsource its building management and cleaning operations to a business specializing in that field. A large utility teams up with a financial institution to handle all of its past collection and data processing needs. Two businesses create a joint venture to develop and market a product that draws upon the strengths of both organizations. These scenarios all involve “partnering,” or the creation of a “strategic alliance” to take advantage of the economies and benefits each partner brings to the table.

Because businesses can only function through their employees, any partnering arrangement involves a combination of work forces, sometimes under the common control of the partners. As a result, there can be unlimited and unanticipated employment law pitfalls. With careful planning, however, these pitfalls can be avoided.

Equal Employment Opportunity Concerns

Under equal opportunity laws such as Title VII of the Civil Rights Act of 1964, an individual can bring a charge of discrimination on the basis of sex, race or religion. In the context of a partnership, it is possible that the individual can be the employee of more than one entity.

The Equal Employment Opportunity Commission (EEOC) has held that separate business operations may be so integrated that they are considered a single employer for purposes of discrimination laws. However, this “integrated enterprise” theory applies whether the separate business entities are so interrelated that they should be treated as a single employer. Moreover, two or more independently owned and operated businesses may share control over an employee’s working conditions, so that they are considered joint employers.

In determining whether joint employment exists, the courts have looked at factors such as:

The right of each employer to establish work schedules and assign work

The right to control wage rates

Whose equipment and supplies are used by the individual

Whose supervisors directly oversee and control the employees work.

For example, the EEOC found that a hotel and a management company were joint employers of a housekeeper discharged by the hotel manager. The Commission deemed that although the employees were paid by the hotel and worked at a facility owned by the hotel, the management firm that operated the hotel retained authority over the hotel manager’s hiring and termination decisions.

To avoid similar problems, the partners must anticipate and structure the relationship with an eye toward either avoiding joint employers status, or toward acknowledging such status and ensuring that adverse employment actions (e.g., firing, discipline) do not run afoul of equal opportunity laws.

Employee Benefit Issues

Under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code (IRC), plan benefits are to be provided exclusively to the employees of the employer. The IRS uses a twenty-part “right of control” test in determining who is an employee for purposes of benefit plan coverage. This test essentially turns on which entity dictates or controls the means, manner, timing and income associated with the work.

When employees are improperly categorized as independent contractors or incorrectly treated as joint employees, disaster can strike. A recent Federal Court of Appeals case, Vizcaino v. Microsoft Corp., dealt with Microsoft “freelancers” who where improperly regarded as independent contractors. In Microsoft, the IRS concluded that a host of freelancers were actually employees for withholding and employment tax purposes. Ultimately, the employer was subject to retroactive withholding and payment of FICA taxes, claims of entitlement to health, welfare, pension and 401(k) benefits and similar benefit claims. Liability for benefit plan coverage could also arise in a partnership context.

The lesson here is that the partners should consider appropriate benefit plan amendments or other measures to insure that benefit plans do not provide unintended coverage to groups of joint employees. Otherwise, partners could face significant liability.

The National Labor Relations Board (NLRB) has held that where two or more employers exert significant control over the same employees and where they co-determine essential conditions of employment, they constitute “joint employers” within the meaning of the National Labor Relations Act. The NLRB bases its decision on whether the “employer meaningfully affects matters relating to the employment relationship such as hiring, firing, discipline, supervision and direction.” Members of a partnering arrangement may find themselves potentially liable for unfair labor practices in connection with employment terminations and the like.

However, a finding of joint employment in a unionized context can have more significant ramifications. If found to be a joint employer, a non-union employer is subject to the same statutory duty to bargain as is the actual employer of the unionized employees. Under the law, the parties must bargain over what are considered to be “mandatory subject,” which would include virtually all aspects of wages, hours, benefits and terms and conditions of employment. Thus, if one of the partners chose to implement changes affecting joint employees, it is likely that either or both parties would have a duty to bargain over the issue.

Perhaps, more importantly, upon a fundamental change in the partnering structure or upon termination of the arrangement, particularly if it would include employee layoffs, there could well be associated bargaining obligations.

This presents significant potential difficulties for a non-union partner. Such a partner may unwittingly find itself bound to an agreement that it never signed, never negotiated and may not have even reviewed prior to the commencement of the joint employer relationship.

Again, the lesson here is to ensure to the extent possible that the unionized partner in any such arrangement retains exclusive control over the unionized workforce so as to avoid any finding of joint employer status.

Accretion Issues

Under the accretion doctrine as applied by the NRLB, previously unrepresented employees can become part of an existing collective bargaining unit subject to all of the provisions of an applicable collective bargaining agreement. Generally, such an accretion occurs where the unrepresented employees have frequent interaction and interchange with represented employees, work side-by-side performing the same tasks and number fewer than the existing bargaining unit. The NLRB has held that such employees share a strong community of interest such that the unrepresented employees should be brought into the existing collective bargaining unit.

From the perspective of a partnership, an accretion can have significant negative consequences. For example, if a previously unrepresented group of employees begins to work side-by-side with a represented group, and both employers constitute “joint employers,” the previously unrepresented group could be accreted into the partner’s collective bargaining unit without any election being held.

Joint or cooperative ventures, partnering arrangements and strategic alliances are proven methods for achieving efficiencies in today’s business world. However, careful planning is needed to ensure that the benefits are maximized and the risks are minimized.  RT

The author is a partner in the Milwaukee law firm of Quarles & Brady LLP.