The "gig economy," characterized by freelance and temporary contract work, has grown exponentially in recent years. A January 2018 NPR/Marist poll found that, currently, one in five jobs in the United States is held by a contract worker and, within a decade, contractors and freelancers could make up half of the American workforce. This remarkable shift away from the traditional employer-employee relationship has and will continue to have many implications in the world of employment law. When thinking about the gig economy and its related legal implications, obvious questions arise around things like entitlement to employee benefits and workers' compensation coverage. Less commonly considered – but similarly impactful – are questions related to affirmative action requirements for federal contractors and subcontractors.
Worker classification is critical for affirmative action planning purposes because, under the Office of Federal Contract Compliance Programs' (OFCCP) regulations, all "employees" must be included in a contractor's affirmative action program (AAP). In the OFCCP context, federal contractors who use long-term "temporary" and contract workers to perform various job functions may struggle with who should be considered an "employee." While some statutes and regulations explicitly define the term "employee," the laws enforced by OFCCP articulate no such definition. However, contractors can find important guidance in OFCCP's Federal Contract Compliance Manual (FCCM), the Agency's procedural framework for executing compliance evaluations. The FCCM provides that, if a contractor is not certain whether an individual working at its establishment is an "employee," it should examine and weigh the individual worker's relationship to the contractor using factors derived from a Supreme Court case, Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992).
Robert Darden had an agreement with Nationwide Mutual Insurance Company to exclusively sell its policies. In exchange, Nationwide agreed to pay Darden commissions on his sales and enroll him in a company retirement plan. When the relationship between Darden and Nationwide ended, Darden began selling insurance policies for several of Nationwide's competitors, disqualifying him from receiving his retirement benefits per the contractual terms. In response, Darden sued Nationwide for violating the Employee Retirement Income Security Act of 1974 (ERISA). His case eventually reached the U.S. Supreme Court. In its decision, the Court addressed the issue of how to construe the meaning of "employee" where the relevant statute does not helpfully define it. The Court held that, in these situations, a common-law test based on agency principles should govern the assessment. This test is comprised of several factors to be applied and weighed in order to make the determination as to whether a worker should be considered an "employee."
While no one factor is determinative, among Darden's most important factors are:
In practice, perhaps the most decisive factor is whether the worker is on the contractor's payroll versus the payroll of a third party. In any event, the analysis is a fact-specific, case-by-case exercise rather than a bright-line test.
The question of whether a worker (or group of workers) falls within OFCCP's jurisdiction almost always arises in the context of an OFCCP compliance evaluation. OFCCP may explicitly ask whether all employees are included in a contractor's affirmative action plan. It may also ask whether there are other workers at the establishment. Often times, these questions stem from OFCCP's review of the contractor's EEO-1 reports (which include headcount), from manager or employee interviews, or from OFCCP's on-site observation that there are more workers at the establishment than reflected in the AAP. In any event, contractors should be prepared to delineate individuals who are employees included in the contractor's AAP and those who are workers who fall outside of OFCCP's jurisdiction.
One might ask whether it is worth the effort to determine who should or should not be included in an AAP. In answering this question, there are a number of risks that must be considered. Contractors who take a broad-brush approach and include non-employees in their AAP are unnecessarily increasing the scope of OFCCP's evaluation. OFCCP may presume that the contractor is responsible for hiring and pay decisions related to these non-employees when, in fact, it was not involved in those decisions. Further, inclusion of these workers could artificially inflate applicant or hire pools, which could affect the statistical analyses that OFCCP often relies upon to prove systemic discrimination. Finally, inclusion of non-employees could increase legal exposure due to non-compliance with recordkeeping obligations.
With these risks in mind, where contractors have doubts or uncertainty about how to classify particular workers, we recommend a thoughtful, deliberate approach that includes weighing the factors set out in Darden to make a well-reasoned determination. As a best practice, contractors should document the analysis and retain this documentation in the event OFCCP questions employee headcounts. OFCCP may ultimately conduct its own analysis and make a final determination about who is an employee; however, having a thorough, well-supported internal analysis could be persuasive to the Agency.
If you have any questions or concerns about worker classification, please reach out to Michelle or Suzanne.