Employee or Independent Contractor?

PRO Act Would Upend U.S. Labor Laws for Non-Union and Unionized Employers Alike

From JDSupra, Maury Baskin, Kevin Burke, Michael Lotito, and Alan Model discuss some of the key provisions of the Protecting the Right To Organize Act (PRO Act) which has bee reintroduced to Congress and has some commentators concerned because the Democrats control the House, Senate and White House. Maury, Kevin, Michael and Alan write: 

On February 4, 2021, House and Senate Democrats introduced the Protecting the Right to Organize (PRO) Act.  Introduction was expected, as President Biden pledged to be “the strongest labor president you have ever had” during his candidacy, and the PRO Act was a cornerstone of his election platform. As discussed in Littler’s WPI Election Report and on the eve of President Biden’s inauguration, the PRO Act would have significant implications for all private sector employers in the United States.  This sweeping legislation, which initially passed the House in February 2020, extends well beyond union organizing.  Non-union and unionized employers alike should understand the scope of its proposed changes, and the practical impact those changes would have on their relationship with employees, and their operations, should it ultimately become law.

Business leaders, in-house counsel, and even private practitioners commonly view the National Labor Relations Act (NLRA) as applicable only to unions and unionized employees; this is not the case. The NLRA has always applied to non-union employees, and over the last decade, National Labor Relations Board (NLRB or Board) decisions and administrative actions have applied the NLRA’s scope more broadly in non-union settings. The NLRB’s expansive application of the NLRA includes challenges to non-union employers’ company handbooks, use of mandatory arbitration agreements and policies prohibiting union organizing through corporate email systems. Expansive interpretations of whether employee internal complaints rise to the level of protected concerted activity have affected non-union employers as well. Thus, the impact of NLRB decisions should inform every organization’s human resource agenda, regardless of whether their employees are represented.  The novel concept of minority unions may gain further traction with an expansive interpretation of protected concerted activity and the PRO Act’s proposed enhanced remedies for alleged violations of the NLRA.

The PRO Act encompasses more than 50 significant changes to current law and seeks to overhaul the NLRA for the first time in more than 70 years. Set forth below are the most noteworthy aspects of the PRO Act, including that it would:

  • Effectively overturn state “right to work” laws
  • Codify the “ABC test” to deem independent contractors “employees” covered by the NLRA
  • Limit the ability of employers to contest union election petitions and allow unions to engage in coercive tactics long held to be unlawful
  • Restrict the ability of employers to obtain labor relations advice
  • Facilitate union organizing in micro-units
  • Redefine the definition of “supervisor” to include more frontline leaders as “employees” covered by the NLRA
  • Change the definition of “joint employment” and force businesses to alter their structures or face liability
  • Give employees the right to utilize employer electronic systems to organize and engage in protected concerted activity
  • Prohibit employers from using mandatory arbitration agreements with employees
  • Force parties into collective bargaining agreements via interest arbitration
  • Expand penalties for violations of the NLRA

State Right-to-Work Laws Protecting Employee Freedom of Association Would Effectively be Eliminated

Twenty-seven states currently have right-to-work laws, permitted by the NLRA, that provide employees cannot be compelled to join or pay dues to a union as a condition of their employment. The PRO Act effectively overturns these state laws by amending the NLRA to permit “fair share agreements.” The PRO Act states contract provisions requiring that “all employees in a bargaining unit shall contribute fees to a labor organization for the cost of representation, collective bargaining, contract enforcement, and related expenditures as a condition of employment shall be valid and enforceable notwithstanding any State or Territorial law.” By compelling all employees in a bargaining unit to contribute fees to the union as a condition of keeping their jobs, the PRO Act would provide a financial benefit to unions at the expense of each covered employee.

Independent Contractors Likely Deemed “Employees” with the “ABC Test”

By limiting NLRA coverage to “employees,” Congress made a deliberate choice to exclude independent contractors from collective bargaining and instead to treat each independent contractor as a business governed by market forces. With the country’s workforce increasingly joining the gig economy as independent contractors, the PRO Act seeks to revise the NLRA to incorporate the “ABC test” and reclassify millions of traditional independent contractors as “employees” subject to union representation. The restrictive ABC test precludes independent contractor status unless “(A) the individual is free from control and direction in connection with the performance of the service, both under the contract for the performance of service and in fact; (B) the service is performed outside the usual course of the business of the employer; and (C) the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.”

California’s implementation of the ABC test in Assembly Bill 5, which became law in 2019, resulted in a backlash from technology and other businesses. The California legislature enacted AB 5 to make the use of independent contractors in certain industries nearly impossible. At the urging of organized labor, AB 5 codified the modified ABC test as rewritten by the California Supreme Court in its Dynamex v. Superior Court1 decision. Prong B of the ABC test made it much harder for a worker to be classified legally as an independent contractor. As a result, California businesses had either to assume all liability associated with an employer-employee relationship or stop using the services of independent contractors who did not meet AB 5’s stringent test. In November 2020, 58.4% of voters in California passed Proposition 22, supporting the societal benefits of gig workers and rejecting California state and labor leaders’ efforts to force their pro-labor agenda on others.

Through the PRO Act, Congress seeks to decide “once and for all” at the federal level the independent contractor versus employee classification issue. Implementing the ABC test through the PRO Act would compel employers to terminate independent contractor relationships or submit to the added burdens of converting independent contractors to regular employees despite the preference of many contractors to remain independent.

Employers Would Need to Change their Business Structure or Face Joint Employer Liability 

The PRO Act seeks to end in unions’ favor the ongoing dispute regarding the applicable test for joint employment liability. The NLRB’s 2015 Browning-Ferris Industries of California, Inc.4 decision, which dramatically expanded the definition of joint employer and categorized many more independent companies as joint employers, upended years of precedent. Under Browning-Ferris, two entities were deemed joint employers based on the mere existence of reserved joint control, indirect control, or control that was limited and routine. Browning-Ferris drastically increased the universe of potential joint employers and was the subject of intense scrutiny, including congressional hearings geared toward overturning the decision. A joint employer may be required to bargain with a union representing jointly employed workers, may be subject to joint and several liability for unfair labor practices committed by the other employer, and may be subject to labor picketing that would otherwise be unlawful.

On February 25, 2020, the NLRB released its long-awaited final rule regarding joint-employer status under the NLRA, which became effective on April 27, 2020. The final rule restored the pre-Browning-Ferris joint-employer standard that an entity must possess “substantial direct and immediate control” over another’s employees to be considered a joint employer, and provided guidance on that key term. Under the final rule, a business is considered a joint employer of another’s employees only where its control of the other’s employees “has regular or continuous consequential effect on an essential term or condition of employment,” and is exercised on more than a “sporadic, isolated, or de minimis basis.”

The PRO Act would embed the Browning-Ferris rule in the NLRA, so that a putative joint employer’s reserved and indirect control could subject it to joint-employer status and liability. In that regard, the PRO Act states that a joint-employer relationship exists where each alleged joint-employer

codetermines or shares control over the employee’s essential terms and conditions of employment. In determining whether such control exists, the Board or a court of competent jurisdiction shall consider as relevant direct control and indirect control over such terms and conditions, reserved authority to control such terms and conditions, and control over such terms and conditions exercised by a person in fact: Provided, That nothing herein precludes a finding that indirect or reserved control standing alone can be sufficient given specific facts and circumstances.

(emphasis added).

This new standard would nullify the Board’s joint employer rule.  In practice it would subject franchisors to potential liability for actions taken by their franchisees, and in conjunction with the expansive new definition of “employee,” would likely also define employees of franchisees as employees of the national brand. Employers that currently contract for leased or temporary workers would also be affected and may have to reassess or change their business practices.

Mandatory Arbitration Agreements Prohibited, Disallowing Class Action Waivers

Since the NLRB’s 2012 D.R. Horton decision, the legality of class and collective action waivers in arbitration agreements has been a hot topic for all U.S. employers. Commonly implemented to build efficiencies into employment-related disputes, class and collective action waivers generally prevent employees from filing claims related to their employment on behalf of a proposed class of other employees. In D.R. Horton, and subsequently in Murphy Oil, the NLRB ruled that arbitration agreements that preclude employees from pursuing employment claims on a class basis violate the NLRA’s protection of concerted activity. In May 2018, the Supreme Court overruled the Board’s decision in Epic Systems Corp. v. Lewis,5 finding that the Federal Arbitration Act (FAA) requires enforcement of arbitration agreements and that the NLRA does not override the FAA.

In order to avoid the Supreme Court’s ruling, the PRO Act would make it illegal for any employer “to enter into or attempt to enforce any agreement, express or implied, whereby … an employee undertakes or promises not to pursue … any kind of joint, class, or collective claim arising from or relating to the employment of such employee … .” Thus, the PRO Act would overrule Epic Systems, which permitted individual arbitration agreements, and force employers nationwide to revise handbooks, restructure employment agreements, and defend against broad litigation from an expanded pool of “employees.”

Differences between the 2021 and 2020 Versions of the PRO Act

The version of the PRO Act recently introduced differs from the version that passed the House last year. The current version of the bill lacks a whistleblower protection provision that would have empowered the Secretary of Labor to investigate and adjudicate certain retaliation claims, including through civil enforcement efforts. There is also no requirement in the recent version that the Government Accountability Office prepare a report on “sectoral bargaining,” which was a feature of last year’s version. Most collective bargaining in the United States occurs at an enterprise level, meaning that different businesses within the same industry (or a business with multiple unionized locations) will generally bargain separate contracts for each location. Sectoral bargaining, which is legal in countries like Germany but is not currently viable in the United States, generally means that all workers within an industry fall under the same collective bargaining agreement, regardless of location or employer.

More to Come

Prospects for passage are unclear at this time. It is expected that the PRO Act will pass the House again, but it is unclear if the legislation has support from all 50 Senate Democrats or if all Senate Republicans will oppose it. If options for full passage are too narrow, it is possible that discrete portions of the bill might pass as add-on or trailer bills with must-pass pieces of legislation like defense bills. It is also possible that concepts from the legislation will be applied to federal contractors through executive action, for example the requirement to provide employee contact information to unions during election campaigns, the “persuader” rule, or mandatory interest arbitration of first contracts.

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