© 2015 fox rothschild pennsylvania association of intermediate units mechanics of subcontracting/...

© 2015 Fox Rothschild

Pennsylvania Association of Intermediate Units

Mechanics of Subcontracting/Joint Employment Issues

November 4, 2015

3:00-4:30 p.m.

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Economic and Business Advantages for Using Independent Contractors

• According to a 2006 report by the Government Accountability Office, the number of independent contractors in the U.S. workforce increased by 24.5% from 1995 to 2005. This was due, in large part, to a combination of two factors: (1) economic and other advantages derived from the use of independent contractors; and (2) lax regulatory enforcement.

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Reasons for UsingIndependent Contractors

• School entities are not required to withhold taxes; make social security and Medicare contributions on the fees paid to independent contractors; pay unemployment taxes; provide coverage for workers’ compensation insurance; or provide PSERS payments.

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• Independent contractors are not required to be paid minimum wage or overtime pay.

• Employee benefit plans, including PSERS, only cover employees, not independent contractors.

• Pennsylvania labor laws do not afford independent contractors the right to be represented by a labor union.

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• Districts can more easily expand or contract their workforces to accommodate workload and student enrollment fluctuations.

• In order to better compete in the marketplace, intermediate units often find themselves using an independent contractor model in order to provide more efficient services to the constituent districts.

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• A district that needs to supplement its employees may have either an internal hiring freeze in place or the administration may be discouraged by the board or their superiors from increasing headcount or payroll costs.

• Workers who have specialized talents or technical expertise, and hence are in demand, may insist or indicate a strong preference that they be retained on an independent contractor basis.

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The Test for Independent Contractor Status

• The 2006 GAO report addressing employee misclassification reached the conclusion that “the tests used to determine whether a worker is an independent contractor or an employee are complex, subjective, and differ from law to law.”

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The Test for Independent Contractor Status

• There is one overriding constant factor in the various tests for independent contractor versus employee status; whether the employer has the “right to control the manner and means” by which a worker accomplishes the end product of his/her services. In determining whether or not an employer has such a right to control, many factors are taken into account that may indicate whether or not an employer has retained or used such control.

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IRS Test

• While the IRS has articulated a three-part test, it essentially considers about 20 factors in determining independent contractor status under the “common law” test it follows. Yet, in the IRS online guide, it states that: “All information that provides evidence of the degree of control and the degree of independence must be considered.”

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July 15, 2015Administrator David Weil Test

• Multifactorial “economic realities” test, which focuses on whether the worker is economically dependent on the employer or in business for him or herself.

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• The economic realities factor should be applied in view of the Fair Labor Standards Act’s broad scope of employment and “suffer or permit” standard.

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• The control factor should not be given undue weight. The factors should be considered in totality to determine whether a worker is economically dependent on the employer, and thus an employee.

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• The courts have described independent contractors as those workers with economic independence who are operating a business of their own.

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U.S. Department of Labor Test

• The economic realities factors guide the determination of whether the worker is truly an independent business or is economically dependent on the employer.

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– Is the work an integral part of the employer’s business?

– Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?

– How does the worker’s relative investment compare to the employer’s investment?

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– Does the work performed require special skill and initiative?

– Is the relationship between the worker and the employer permanent or indefinite?

– What is the nature and degree of the employer’s control?

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Consequences of Misclassification

• Unpaid federal, state, and local income tax withholdings and Social Security and Medicare contributions.

• Unpaid unemployment insurance taxes, both to the federal government and to state governments.

• Unpaid workers’ compensation premiums.

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• Unpaid overtime compensation and/or minimum wages.

• Unpaid work-related expenses.• Unpaid sick and vacation pay.

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• Union claims that the position should be included within the bargaining unit.

• Coverage under district benefit plans.• Coverage under PSERS.

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• The Affordable Care Act provides that if an employer has fewer than 50 full-time equivalent employees, but would equal or exceed that number if independent contractors were recharacterized as employees by the IRS or a court, the Act would require that the entity provide qualifying medical coverage to its employees, which would include misclassified independent contractors.

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• Impact on union organizing and elections.

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IRS Position

• The IRS has abandoned its old 20-point test for a more streamlined test of 3 factors an employer should consider when deciding on the status of a worker or a group of workers, but the federal agency acknowledges that there is no “magic” formula that makes the worker an employee or independent contractor, and no one factor can stand alone.

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IRS Position

• The key, it says, is to “look at the entire relationship” and to document each of the factors in making the determination. The factors are:

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IRS Position

– Behavioral: Does the employer control or have the right to control how the worker does his/her job?

– Financial: Are the economic aspects of the worker’s job, including expenses and tools or supplies, controlled by the employer?

– Type of Relationship: Is the work performed a key aspect of the operation; will the relationship continue; are there written contracts or employee-type benefits?

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IRS Position

• Districts that are unsure of the proper classification must focus their assessment on the degree of control exerted on the worker, which is essentially the control test espoused by PSERS.

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IRS Position

• If a district’s main goal is for the task to be completed at a certain time but the employer does not care how the job is accomplished between Point A and Point B – that is a good indicator that the worker is an independent contractor. The more factors such as those one can show, the better.

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IRS Position

• For many years, districts and other employers tried to argue that simply because they had identified the worker as an independent contractor that this, in and of itself, was sufficient, but the courts and the workforce agencies have rejected that argument. Just because you call it a duck does not make it a duck.

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IRS Position

• Districts that misclassify workers as independent contractors face huge liability, including unpaid federal, state, and local income tax withholdings; unpaid Medicare and Social Security contributions; workers’ compensation and unemployment premiums; back wages for unpaid overtime for non-exempt employees; and in some cases, PSERS payments, medical benefits, and other benefit-related issues.

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IRS Position

• It is easy to see why a district would want to classify a worker as an independent contractor, but, if the district is wrong, all of the expenses it was trying to avoid it will be on the hook for. If you gamble and are wrong, the stakes are very high.

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PSERS Position on Independent Contractors

• The Public School Employees’ Retirement Board has been granted authority to determine whether a person is a school employee

• In cases of doubt, the Board will review all circumstances surrounding the employment of the person seeking membership in the program

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PSERS Position onIndependent Contractors

In Zimmerman v. Public School Employes’ Retirement Board, 522 A.2d 43, 45 (Pa.1987), the Pennsylvania Supreme Court identified a ten-part test as a guide to be following in determining whether an individual is a “school employee” under the Retirement Code or an independent contractor. The factors to be considered in accordance with that test are:

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1. Control of the manner in which the work is to be done;

2. Responsibility for result only;

3. Terms of the agreement between the parties;

4. The nature of the work or occupation;

5. The skill required for performance;

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6. Whether one is engaged in a distinct occupation or business;

7. Which party supplied the tools;

8. Whether payment is by time or by the job;

9. Whether the work is part of the regular business of the employer; and

10.Whether there exists a right to terminate the employment at any time.

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PSERS MembershipEligibility Questionnaire

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Joint Employer Liability

• This is an issue that is being addressed by the National Labor Relations Board that technically does not have authority over Pennsylvania school entities. That being said, the Pennsylvania Labor Relations Board has had a history of following the National Labor Relations Board’s tests.

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• The NLRB has, since a pair of rulings in 1984, used a standard that treats two companies as joint employers if both exercise a significant degree of control over the same employees. However, the Labor Board indicated last year that a shift might be in the cards when it called for input on whether the agency ought to stick to its existing joint employer standard or adopt a new test.

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• NLRB general counsel, Richard Griffin, has argued that the current test undermines meaningful collective bargaining and should be scrapped. Griffin has pushed for a “totality of circumstances” standard, where joint employer status exists when a company has enough influence over the working conditions of the other entity’s employees so that meaningful bargaining could not occur without that first company being present.

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Subcontracting Out Servicesin Challenging Economic Times

and Obligations UnderActs 195 And 88

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Pennsylvania Labor Relations BoardPrecedent

• The Pennsylvania Labor Relations Board (“PLRB” or the “Board”) has addressed the issue of subcontracting bargaining unit work and the duty to negotiate over the issue of subcontracting.

PLRB/SubcontractingBargaining Unit Work

• The Board will find that an employer has engaged in an unfair labor practice if it refuses to bargain with the union over the subcontracting of bargaining unit work. Elizabeth Forward Sch. Dist. v PLRB, 624 A.2d 215 (1992).

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• If an employer is contemplating subcontracting bargaining unit work, it has an affirmative duty to seek out the representatives of its employees, announce its intentions to subcontract and provide all relevant information for them to fulfill their bargaining obligation. Lancaster County, 24 PPER 24054 (Final Order, 1993), aff’d sub. nom. County of Lancaster v. PLRB, 25 PPER ¶ 25098 (Court of Common Pleas, Lancaster Co., 1994).

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• In determining whether the employer fulfilled that obligation, the Board will look at a totality of the circumstances.

• The “key factor” is whether the employer made counterproposals. Lower Dauphin School District, 19 PPER 19195 (Final Order, 1989).

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• Must bargain to impasse before subcontracting. What, then, is impasse?– Bargaining in good faith “requires the parties to make a

serious effort to resolve differences and to reach common ground.” Morrisville School District v. Pennsylvania Labor Relations Board, 687 A.2d 5, 8 (Pa. Cmwlth. 1997). “The duty to bargain in good faith extends to the subject of subcontracting bargaining unit work.” Id. Before an employer may subcontract bargaining unit work, it “has the obligation to bargain in good faith to a bona fide impasse.” Id.

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• The Labor Board will look at certain factors to determine whether good faith bargaining has occurred, including: (1) notice of the intent to investigate subcontracting; (2) whether the employer truly negotiated over the subcontracting issue; (3) whether the employer extended the deadline to accept the third party contract to allow more time to negotiate; and (4) whether a true impasse was reached.

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• What does that type of standard actually translate to?– Must be transparent

– You must engage in true bargaining and not surface bargaining

– You must be patient and realize beginning negotiations in January may not mean you will be able to subcontract in July

– Be prepared to go to Fact Finding if necessary

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PLRB/SubcontractingBargaining Unit WorkFollowing Furlough

• Unilateral transfer of exclusive unit duties outside unit violates Act 195.– In Neshannock Twp. School District (2012), the

Pennsylvania Labor Board concluded the use of teachers and volunteers to set up, run, and clean up the science lab (tasks previously overseen by the science lab coordinator) was an unfair labor practice for the transfer of work to non-bargaining unit members.

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Online and Cyber Courses

• In the Tredyffrin/Easttown School District decision, the Pennsylvania Labor Relations Board has held that the offering of online courses without teacher involvement is a subcontracting of Bargaining Unit services that needs to be bargained to impasse.

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• The Labor Board would have authority to issue a cease and desist order on the online courses and under certain circumstances, award lost pay to the bargaining unit members who were allegedly deprived of the opportunity to participate in teaching those courses.

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• The only exception that has evolved under the law is under the Rochester Area School District decision. The Pennsylvania Labor Relations Board did not find unlawful subcontracting when the District offered online courses having teachers involved in the monitoring of the course, grading of the course, or presentation of the online programming, even if it meant that the teachers' duties were either reduced or substantially modified as the result of the programming. In other words, technology that utilizes equipment to eliminate most or all of the duties of a position does not constitute the removal of work.

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Upper Merion: TransportationOutsourcing That Wasn’t To Be

• Using the case law as actual guidance, the Upper Merion process of outsourcing it transportation services was based on lessons learned from missteps in other parts of the State.

• What this fact pattern highlights is the difficulty of outsourcing this work, especially in a timely manner.

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• In December of 2010, the Board approved a resolution authorizing the Administration to explore outsourcing of its bus services.

• In 2010-2011, the bus drivers of the Upper Merion Area School District were the highest paid in the County.

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• Before a transfer of bargaining unit work may occur, the employer has an “affirmative duty to seek out the representatives of its employes, announce its intentions and provide the employe representative with relevant information necessary for it to fulfill its bargaining obligation.” Faculty Fed. of Comm. College of Philadelphia, Local 2026, AFT, AFL-CIO v. Philadelphia Comm. College, 25 PPER 25072 (1994), citing AFSCME, District Council 89 v. Lancaster County, 24 PPER 24054 at 132 (Final Order, 1993).

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• In Plum Borough School District, the District argued that the Association had knowledge of the transfer of secretarial duties to Kelly when Association representatives heard about the proposed changes while attending a school board meeting, but remained silent and did not request the District to bargain.

• The Labor Board said management must proactively seek out the Union when it desires to outsource.

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• As the case law instructs, Upper Merion was completely transparent with the Union by providing them unfettered access to the RFP process, the savings projected from the private carriers, and the savings the District needed in its budget.

• The District positioned itself with its own in-house proposal. Because of the built-in benefits and PSERS obligations, the District’s proposal called for salaries at approximately $8.00 less per hour than under the current contract.

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• The District also sought dramatic concessions with benefits for part-time drivers, obligations to fill full-time positions, overtime distribution, and holiday pay in order to make it work with the Union.

• The Union proposed a freeze in year one with 3% increases each of the following two years. Everything else was “status quo.”

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• Several bargaining sessions were held in the spring and summer of 2011. Neither side moved substantially off their original positions.

• The District’s movement, however, made the in-house proposal more expensive that the third party contractors.

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• In September 2011, the District requested Fact Finding. Even before Fact Finding, the District believed it was at impasse with the Teamsters, thus giving them cover to subcontract.

• An impasse in negotiations may arise where “the parties have exhausted the prospects of concluding an agreement and further discussions would be fruitless... [and] all that can be said with confidence is that an impasse is a ‘state of facts in which the parties, despite the best of faith, are simply deadlocked.’” Norwin School District v. Belan, 510 Pa. 255, 268 n.9, 507 A.2d 373, 380 n.9 (1986).

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• The Fact Finder, while recognizing the savings the District could realize from outsourcing (approximately $1 million per year), essentially ordered a compromise that would cost somewhere between the private vendor’s proposal and the cost of doing nothing and maintaining status quo benefits and wages.

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• Timing of this decision by the Fact Finder was problematic in November 2011. With a municipal election occurring, significant changes to the Board was about to occur.

• Some felt they could not bind another Board to their decisions.

• Some felt the Fact Finder’s Report was a fair compromise.

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• The Board accepted the report, the Union rejected.

• The new Board desired to start over with the Union. The Union was unwilling to take anything less than status quo wages.

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• Well into 2012, the Board put out “final best offers.”

• Ultimately, the matter settled for a six year contract. Wage freeze for all six years; massive healthcare concessions, especially in the out years of the contract’ a rewrite of the overtime provisions; and concessions regarding full-time positions.

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• The takeaway from this process was simple:– Never underestimate the outside factors off the table that

will ultimately determine if your district will outsource– Do your homework before subcontracting and before

bargaining– Be transparent or face an unfair labor practice– Reach impasse– Understand there is a silver lining to keeping the work in-

house. Significant concessions may set precedent for other groups.

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Contact Information

Jeffrey T. Sultanik, EsquireChair, Education Law Group

Fox Rothschild LLP10 Sentry Parkway, Suite 200

P.O. Box 3001Blue Bell, PA 19422-3001

(610) [email protected]

© 2015 fox rothschild pennsylvania association of intermediate units mechanics of subcontracting/...

Documents

independent contractor

independent contractor

use of independent contractors

employee status

degree of control

employee misclassification

threepart test

pennsylvania labor laws