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Types of Employers: Federal

Types of Employers requirements by state

Author: Jed Marcus, Bressler, Amery & Ross, P.C.

Summary

  • The definition and the type of employer often controls the laws that apply to that organization. See An Employer Defined.
  • Private employers are privately owned and operated and must comply with numerous laws. See Private Employers.
  • Cities, states and other governmental agencies are considered public employers. See Public Employers.
  • Joint employers may be held legally responsible for another's workplace policies. See Joint Employers.
  • There are several factors in determining whether separate entities are considered a single employer. See Single Employers (Integrated Enterprises).
  • Franchisors are generally not held to be a joint employer with a franchisee unless there is a direct link between the two entities. See Franchisors and Franchisees.
  • Typically, a successor is a buyer that takes on the legal obligations of its predecessor. See Successor Employers.
  • An employer generally contracts with a professional employer organization to hire its employees for an administrative fee and take on all management tasks. See Professional Employer Organizations.
  • Examples of nonprofit employers include religious, charitable and educational organizations. See Nonprofit Organizations.

An Employer Defined

As the economy changes, new employment relationships have evolved, with more and more employees working directly for franchisees, staffing agencies, leasing companies and third-party management companies, rather than traditional employers.

There are many possible ways to define an employer. The definition of an employer is important as it typically controls what laws apply to an organization. Further, the definition of an employer varies based on the employer size requirements for coverage under federal, state and local laws. For example, virtually all employers with 15 or more employees working in each of 20 or more calendar weeks in the current or preceding calendar year must comply with Title VII of the Civil Rights Act of 1964 (Title VII). The Immigration Reform and Control Act (IRCA), on the other hand, covers employers with just one employee.

There are various types of employers and each may be governed by different laws based on the law's definition of employer. From private employers to franchisors, each organization is unique in its structure and should be aware of what laws are applicable to them and their employees.

Private Employers

Private employers are those employing persons or entities that are privately owned and operated and otherwise not controlled in any meaningful way by the government or any governmental agency. Examples of private employers are such well-known companies as Google, J.C. Penney's and The Red Cross. A private employer can be either for-profit or nonprofit.

Private employers must comply with numerous state local and federal labor and employment laws. However, in some cases, coverage depends on the number of workers they employ. For example, Title VII, the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA) apply only to employers that employ 15 or more employees. Similarly, the Age Discrimination in Employment Act (ADEA) and the Consolidated Omnibus Budget Reconciliation Act (COBRA) require at least 20 workers to trigger coverage, while the Family and Medical Leave Act (FMLA) and the Affordable Care Act (ACA) apply to companies employing at least 50 employees.

Even if federal, state or local employment laws otherwise have minimum thresholds, employers of all sizes have additional compliance requirements and modified thresholds if they have been awarded federal contracts by the government. For example, private employers that obtain federal contracts to work on public projects must agree to pay wage rates above what they would ordinarily be required to pay, called the "prevailing wage," as set forth in several wage and hour laws, including the Davis-Bacon Act, the McNamara-O'Hara Service Contract Act (SCA) and Walsh-Healey Act. Federal contractors are also required to adopt affirmative action plans and comply with federal antidiscrimination laws, even if they otherwise would not be covered.

For additional information, see the Does This Law Apply to My Organization charts outlining the applicability of federal and state laws.

Public Employers

Cities, states and other governmental agencies are public employers, also known as public sector employers. Public employers must also comply with federal employment laws, although there are a few exceptions. For example, public employers must comply with Title VII, the ADA, the ADEA, the Fair Labor Standards Act (FLSA) and the Pregnancy Discrimination Act (PDA). Some laws are specifically not applicable to public entities. For example, the National Labor Relations Act (NLRA) expressly excludes workers who are employed in the public sector.

Even where federal laws do not cover public sector employees, there may be complementary state laws that govern public employment. For example, even though the NLRA does not cover public employment, many states have enacted state laws that permit and regulate collective bargaining and union organizing of public sector employees.

Joint Employers

NOTE: The US Department of Labor (DOL) has proposed a regulation that would, if finalized, update and clarify its interpretation of joint employment status under the Fair Labor Standards Act.

A joint employer refers to when one business is so intertwined with another that it can be held legally responsible for the second business's workplace policies. A joint employment relationship exists when two entities exercise control over the same employees. A finding of joint employment status is significant because all joint employers may be individually and jointly responsible for compliance with employment statutes such as the FLSA and the NLRA.

For example, where a joint employment relationship is found to exist, both employers can be held responsible under the NLRA for the unfair labor practices or collective bargaining obligations of the other. Under the current test applied by the National Labor Relations Board (NLRB), an entity will be found to be a joint employer with another where the alleged joint employer has control or the potential to control employees and their terms and conditions of employment, either directly or indirectly.

Single Employers (Integrated Enterprises)

There may be times that employees argue that two different entities form a single employer under an "integrated enterprise" theory. Whether a court should consider two entities as an integrated enterprise rests on the degree of operational entanglement - whether operations of the companies are so united that nominal employees of one company are treated interchangeably with those of another. Single employer status ultimately depends on all the circumstances of the case and is characterized as an absence of an arm's length relationship found among unintegrated companies. Four factors are considered in determining whether separate entities are a single employer:

  1. Functional integration of operations;
  2. Centralized control of labor relations;
  3. Common management; and
  4. Common ownership.

It is important to keep in mind that no one factor is controlling, although the first three factors, particularly centralized control over labor relations, are generally considered more compelling than the fourth. Additional operational factors include:

  • The unity of ownership, management and business functions;
  • Whether the entities present themselves as a single entity to third parties;
  • Whether the parent company indemnifies the expenses or losses of its subsidiary; and
  • Whether one entity does business exclusively with the other.

Franchisors and Franchisees

A franchise is the "right or license granted to an individual or group to market a company's goods or services in a particular territory" or a "business granted such a right or license," according to the Merriam-Webster Dictionary. Some examples of franchise businesses include many fast food chain restaurants (e.g., McDonald's and Taco Bell).

Federal regulations impact elements of the franchise relationship, including the definitions of franchisors and franchisees. A franchisor is defined as "any person who grants a franchise and participates in the franchise relationship" (e.g., corporate Subway). A franchisee is "any person who is granted a franchise" (e.g., the operator of a Subway restaurant). +16 CFR 436.1.

Typically, employees who work for a franchisee do not work for the franchisor. Instead, they are employed by the local owner and operator of the store or restaurant. Franchisors generally are not held to be joint employers with their franchisees where there is no direct link between the franchisor and hiring, firing, wages, breaks and other day-to-day operations of the franchisee. However, a joint employer relationship may exist depending on the level of control over the conditions of employment, if any, exercised by the franchisor.

As indicated above, once a joint employer relationship is established, the franchisor may be responsible for any and all violations of labor and employment laws, e.g., the ADA, ADEA. For example, if a court or governmental agency determines that an employee had been unlawfully terminated or demoted by the franchisee because of the employee's race, union activity or disability or in retaliation for complaining about wage and hour violations, the franchisor, as a joint employer, could be held equally liable with the franchisee for breaking the law and remedying the violation.

Various states have laws aimed at protecting franchisors for the actions of their franchisees. Typically these laws state that franchisors are not considered employers of franchisees and therefore not liable for their employment-related claims.

Successor Employers

When one company purchases another company, or when two companies decide to merge, thereby forming one larger company, the purchaser or surviving company may take on legal obligations that existed before the transaction and may even be obligated to recognize and bargain with a union or be bound by an existing collective bargaining agreement (CBA). A buyer that takes on the obligations of its predecessor under labor and employment laws is known as a successor. Whether a buyer is a successor will depend on the form of the transaction and the actions of the buyer once the transaction is completed.

For example, if the acquisition is structured as a stock purchase, with the purchasing company as the survivor, the target company's employees will not be terminated and the buyer will automatically inherit all of the target company's employee benefit plans. In that case, the buyer is a successor as there actually has been no change in the identity of the employer, which never changed corporate form.

If, on the other hand, the acquisition is structured as an asset purchase, successorship is not guaranteed. The buyer has the flexibility to choose the assets and liabilities it wishes to acquire, including the employees and employee benefit plans. In an asset purchase, the target company's employees' employment with the target company will be deemed to have terminated, in which case, they may be hired by the buyer. In deciding whether or not to hire these employees, the buyer will have to navigate through various labor laws.

A buyer in an asset purchase may become a successor under the NLRA where it makes clear its intent to retain a majority of employees in the bargaining unit. In that case, the successor is required to adopt the existing CBA at the outset and then bargain with the union over any changes to the terms and conditions of employment. If, however, the successor announces its intent to set materially different initial terms and conditions of employment prior to offering employment, it still must recognize the union, but it is free to set its own initial terms and conditions of employment.

Successor liability may be imposed for delinquent Employee Retirement Income Security Act (ERISA) fund contributions in the context of a merger in certain circumstances. This is very important because employers that terminate their participation in a management-union multiemployer pension fund may be liable for withdrawal liability, which is an employer's share of the unfunded liability of a pension fund. Unfunded liability occurs when the liabilities of a pension fund are greater than the assets available to pay them.

Normally, when a corporate entity buys the assets of another corporate entity, the buyer is not liable for the withdrawal liability of the predecessor. More precisely, absent specific agreements to assume withdrawal liability, withdrawal liability has traditionally not been extended to a purchaser of the predecessor's assets. However, several courts have held that under the federal common law, the buyer could be liable for the predecessor's withdrawal liability under the successor liability doctrine if:

  • The successor had notice of the claim before the acquisition; and
  • There was substantial continuity in the operation of the business before and after the sale.

The successorship doctrine also applies to federal and state discrimination laws. Under Title VII, for example, a successor employer may be liable for the unlawful acts of its predecessor if, among other things:

  • The successor company had notice of the charge;
  • The predecessor no longer has the ability to provide relief; and
  • There has been a substantial continuity of business operations.

This test has also been used to determine successorship liability under other discrimination laws, such as the ADA.

Also, with regard to the FMLA, a successor employer also has obligations to provide leave for eligible employees who had provided appropriate notice to the predecessor company. The successor also has an obligation to continue leave begun while the employee was employed by the predecessor (including maintenance of health benefits and right of job restoration). This is required even if the successor does not itself meet the FMLA's 50-employee coverage criteria.

Professional Employer Organizations

A company may wish to reduce its workforce in order to reduce its overhead, including the cost of employee benefits and administration, as well as the risks associated with employing a full complement of workers. At the same time, it does not want to sacrifice the training and experience possessed by its workforce. Thus, the company will contract with a professional employer organization (PEO), which will hire the company's employees for an administrative fee and take on all management tasks, such as employee benefits, payroll, workers' compensation, recruiting, risk/safety management and training and development.

Although the PEO becomes the employer on paper, the company continues to direct the employees' day-to-day activities. This arrangement is often called co-employment, and refers to a contractual allocation and sharing of employer responsibilities between a PEO and the client company.

Many states regulate PEOs to ensure that certain employee rights are protected and taxes are actually paid. For example, in New York, PEOs must, among other things:

  • Have a written professional employer agreement between the client and PEO setting forth the responsibilities and duties of each party;
  • Reserve a right of direction and control over the worksite employees;
  • Assume responsibility for the withholding and remittance of payroll-related taxes and employee benefits for worksite employees and for which the PEO has contractually assumed responsibility; and
  • Retain authority to hire, terminate and discipline the worksite employees. See +NY CLS Labor § 922 (2015).

One issue unique to an employer that use a PEO is the payment of taxes and liability for failure to pay. For federal employment taxes, the PEO typically agrees to take on payroll tax obligations in the name and employer identification number (EIN) of the PEO, including obligations to pay wages, deposit taxes and report wages and taxes as required by law. The employer continues to provide daily supervision and direction over the employees, but its payroll tax obligations are transferred to the PEO.

However, if the PEO fails to pay the taxes or penalties, the employer remains liable for the unpaid taxes. In 2016, the Internal Revenue Service (IRS) enacted regulations designed to clarify that, among other things, the employer would not be liable for unpaid taxes if the PEO contractually assumes responsibility for wage and tax payments of its clients' employees, without regard to the receipt or adequacy of payment from the employer.

Another important area involving PEOs is workers' compensation coverage. Workers' compensation insurance is often carried by the PEO. However, because the PEO and the employer are co-employers, they are both protected by state laws that provide that in the event of a work-related injury or illness, workers' compensation claims are the exclusive remedy available to the injured employee, who is then prevented from suing for damages in court. Many states have enacted laws that ensure that PEOs fulfill their obligation to purchase workers' compensation insurance, properly classify employees and pay premiums.

Beyond these two important areas is the recognition that under the typical PEO arrangement, both the PEO and the company are joint employers and both will be responsible for complying with federal and state labor and employment laws. Thus, employers cannot avoid liability under the National Labor Relations Act (NLRA), Title VII of the Civil Rights Act of 1964 (Title VII), the Fair Labor Standards Act (FLSA) or the Family and Medical Leave Act (FMLA), among other laws, by utilizing a PEO.

Nonprofit Organizations

Nonprofit employers, such as religious, charitable and educational organizations, are subject to, and must comply with, the majority of employment laws in the US. In this regard, the employer's status as a for-profit or a nonprofit makes no difference. Thus, they will be subject to state and federal wage and hour, antidiscrimination and the FLSA among others. However, there are some important distinctions.

For example, there are two important coverage issues with respect to the FLSA. First, the FLSA requires that the employer in question be an enterprise that is covered by the Act. Certain nonprofit workplaces are automatically covered as "named enterprises," such as schools, preschools, hospitals, mental health centers and residential care facilities. Other covered enterprises are those that have earned income via interstate commerce resulting in gross revenues over $500,000. Since income from charitable activities does not count towards the $500,000, contributions, membership dues, in-kind donations and proceeds from fundraising special events are not counted.

However, even if the nonprofit is not a covered enterprise under the FLSA, the law still covers many individual employees "engaged in interstate commerce." Most employees are, according to the Department of Labor (DOL), engaged in activities that constitute interstate commerce, including sending and receiving faxes and emails, answering phones, mailing letters and packages and shipping materials. Therefore, even if a nonprofit organization is not a covered enterprise, there is the possibility that its employees are covered by the FLSA.

In addition, state and federal antidiscrimination laws apply to nonprofits in the same way as to for-profit employers, except when it comes to religious organizations and charities. Title VII allows a religious organization to give employment preference to members of its own religion, as long as the purpose and character of the organization are primarily religious. For example, a Catholic church may refuse to hire an applicant who practices Buddhism. A religious organization may not otherwise discriminate on the basis of other protected characteristics.

Lastly, nonprofit organizations (e.g., schools, religious or charitable organizations) are generally tax exempt under the federal Unemployment Tax Act (FUTA). In addition, several states, including Arkansas and Georgia, exempt nonprofit organizations from paying unemployment insurance taxes but requires them to reimburse the state's unemployment fund for its share of any benefits paid to former employees.

Additional Resources

Does This Law Apply to My Organization?