Providing Joint Employer Tax Planning Advice

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Joint-Employer-Tax-Planning On August 27, 2015, the National Labor Relations Board (NLRB) handed down a landmark decision that could have real consequences for subcontractors and potentially franchises and industries that are engaged in joint businesses.  The decision, which was the product of a 3-2 vote involving sanitation workers, revised the “joint employer” standard for determining when one company shares legal responsibility for employees hired by another. 

The case involved whether Silicon Valley recycling plant, Browning-Ferris Industries, should legally be considered the employer of workers supplied by sub-contractor, Leadpoint Business Services.  Browning-Ferris paid Leadpoint to sort recycling materials.  Leadpoint employees separated paper from plastic and glass on conveyor belts which were owned by Browning-Ferris and run by Browning-Ferris employees.  Leadpoint determined its workers’ salaries and decided whom they should hire, fire, and promote, or demote.  Browning-Ferris simply decided what hours they would run their plant and which lines they would run each day.  On one occasion, Browning-Ferris caught a Leadpoint employee drinking whiskey on the job and asked for his termination.  The NLRB decided that this constituted enough “indirect” control to legally classify Browning-Ferris as a co-employer of Leadpoint’s workers, meaning Browning-Ferris would be liable for overtime pay, taxes, and benefits whenever they are mandated for employees. 

Before the decision, one business couldn’t be held liable for employment-related matters at another unless they had direct control over the employees in question.  The new “joint employer” test, however, means that the NLRB could hold businesses responsible for employment policies even if they only exercise indirect control over such employees.  That means employers may be responsible for workers’ rights even if they don’t contract directly with them.  This could have big implications for franchise restaurants and companies who use staffing firms as a labor source.  These staffing firms help the economy run more efficiently by allowing companies to focus on their core specialties while delegating tangential services to sub-contractors.  If the ruling stands however, both entities will become co-employers of the contract workers.  That means an additional level of oversight by the end-user company along with a basket of added complexities could become commonplace in each contracting arrangement.

Now, a union representing workers will be legally entitled to bargain with not only the sub-contractor but also the end-user of the labor.   Attorney Marshall B. Babson who helped write a brief for the U.S. Chamber of Commerce opposing the rule had this to say: “The decision today could be one of the more significant by the N.L.R.B. in the last 35 years. Depending on how the board applies its new ‘indirect test,’ it will likely ensnare an ever-widening circle of employers and bargaining relationships.” Board officials announced as part of the ruling that they would consider the indirect control inquiry on a case-by-case basis.
The 3-2 decision that was handed down on August 27, 2015 was split along party lines.  The three Democrats cited in their decision a “dramatic growth in contingent employment relationships” that “potentially undermines the core protections of the act for the employees impacted by these economic changes.”  The two dissenting republicans voiced their concern saying: “The result is a new test that confuses the definition of a joint employer and will predictably produce broad-based instability in bargaining relationships.”

In view of the NLRB decision, planning taxpayers involved in large subcontractor relationships should consider the following risk minimization techniques:  First, determine whether your subcontractor is itself functioning as a first-tier subcontractor.  For all U.S. subcontractors in your supply chain obtain verification that all workers:

1.    Are subject to payroll tax withholding
2.    Have medical insurance
3.    Are covered by workers compensation
4.    Comply with current and scheduled federal, state and local minimum wage requirements

Taxpayers should instruct their purchasing departments to establish procedures ensuring that all vendors are informed of these requirements and create appropriate verification processes.

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Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Michael Wilshere is a Tax Analyst with R&D Tax Savers.