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Unmasking the charade of the global supply contract: a novel theory of corporate liability in human trafficking and forced labor cases.

  I. INTRODUCTION

 II. GENERAL BACKGROUND
     A. Forced Labor Statistics and Background
        Information
     B. History and Evolution of the Global Supply
        Contracting System

III. ECONOMIC REALITIES TEST
     A. Basic Theory of Joint Employment
     B. Common Law Test
     C. Introducing the Economic Realities Test

 IV. PILGRIM ECONOMIC REALITIES APPROACH
     A. The Global Supply Contract and Dependent
        Contractors

  V. THE TVPRA AND ECONOMIC REALITIES TEST
     A. TVPRA--Relevant Causes of Action (Global
        Contracting "Forced Labor" context)
     B. TVPRA Legislative History--Clear Intent to
        Abolish Slavery
     C. Legislative History of the FLSA

VI. CONCLUSION


I. INTRODUCTION

In February 2007, an investigative trip to China by members of Students and Scholars Against Corporation Misbehavior (SACOM) resulting in the plug being pulled on Mickey and his other Disney pals. (1) As a result of SACOM's 2006 report outlining the "working class hell" conditions suffered by the laborers who manufactured Disney's products, and subsequent media outcry, Disney discontinued its relation with the plant. (2) It is difficult to reconcile the image of Disney's delicate princess dolls, complete with dainty accessories, in the hands of exhausted, sick workers working and living in a dangerous substandard factory and dormitory. (3) Yet, the Disney factory is representative of the overseas factories that constitute pivotal links in the global supply chain of many U.S. and foreign corporations.

Although the global economy has enabled average people access to a diverse and ready supply of inexpensive clothing and electronics, the dark reality is that this access comes at great human expense. The by-products of these cheap products are human trafficking and forced labor. (4) It is not just global criminal gangs that use electronic communications and various modes of transport to exploit vulnerable and desperate people living in poor countries. Although less visible, corporations using global production chains, containing multiple levels of subcontracting and outsourcing, breed human trafficking and forced labor. (5) Corporations driving this dynamic easily avoid accountability given the extraterritorial location of the suppliers, and the appearance of "arm's length" contracts with their suppliers. (6) As Jorge Bustamante rightly points out, "[t]he practice of subcontracting ... labour can also be a gateway for the impunity for abuse of and violations against migrant workers." (7) The caginess of corporations in avoiding liability in the global contracting setting cannot be underestimated. Because corporations have circumvented the law, victims must find new theories of liability. This Article proposes a path of potential relief.

Courts should apply the economic realities test as a vehicle to determine the existence of joint employment between a corporation and their contractor. (8) Under the theory of joint employer liability, corporations would be equally responsible for their contractors' acts in trafficking/forced labor cases pursuant to the Trafficking Victims' Protection Reauthorization Act (TVPRA). (9) Despite attacks from defense counsel, the economic realities test is legally sustainable and legislatively sound. This test was born in response to the Fair Labor Standards Act (FLSA) (10) and other progressive federal labor statutes that embodied strong Congressional intent to improve working conditions, and decrease economic advantage to those violating fair labor standards. (11) Numerous United States Supreme Court and circuit rulings refined and expanded the definition of "joint employer" and shifted the focus of inquiry away from employer control to the dependency of the worker. (12) The TVPRA's vivid legislative history shows congressional concern to decrease human trafficking, punish those who force labor, and address the problem of the foreign contractor. (13) There is a direct and compelling link between the legislative histories of the FLSA and the TVPRA. The economic realities test fits perfectly within the TVPRA's goals and objectives, and should be applied in all TVPRA cases.

Moreover, due to the conflicting and conflating theories regarding issues of agency theory, premise liability, notions of duty and control, and varying standards of intent under secondary liability theories, courts would welcome clarification. By assisting the courts to understand the history, evolution and rationale behind the economic realities test, and the legal and legislative basis upon which it can be applied to today's global contracting practices. Ultimately, courts would be able to pierce the fiction that corporations are innocent of the slavery connected to production of their products and they would be held responsible for their contractors' actions. (14) As one legal scholar writes, "manufacturers not only conspire with their subcontractors in perpetuating sweatshops, they are primarily responsible for creating the problem." (15) As such, the corporations should be held accountable for their actions and greed.

This Article does mean to condemn or expose the contemporary corporate global contracting system (although many renowned authors have written about it). (16) Rather, it hopes to guide the crafting of a legal theory of recovery from corporations involved in this system. The general judicial trend appears to be against finding the corporation responsible in the global supply context--both under primary and secondary theories of liability. In fact, courts, entrenched in antiquated notions of common law continue to dash hopes for financial recovery, further insulating those with the deepest pockets. Moreover, right before the publication of this Article, on April 17, 2013 the Supreme Court announced its decision in Kiobel v. Royal Dutch Petroleum, (17) which ruled that the Alien Tort Statute (ATS), which had been used by non-U.S, citizens to bring lawsuits in U.S. federal court to seek relief for certain violations of international law, including human trafficking had no extra-territorial application. (18) Therefore, it is even more imperative that other theories of liability are needed to hold corporations accountable.

Although there are many possible trafficking scenarios, this Article focuses on the unknown nameless foreign worker who has been trafficked from his or her home country to a foreign country to produce goods for a U.S. corporation. It is not meant to minimize the plight of the vast numbers of domestic workers who toil in sweatshops throughout the United States--especially the undocumented, the immigrant, the under-aged, and the under-educated. (19) However, this Article chooses to put a face and name on the foreign worker since these victims have little or no access to information, resources, and assistance relative to their domestic counterparts in the United States, and therefore have fewer champions.

Section I of this Article introduces the general issue of corporate liability in the global supply scenario and briefly summarizes various problems trafficking and forced labor victims face when seeking restitution against corporations.

Section II sets forth a background of the concept of forced labor and human trafficking: its origins, evolution (including the concept of sweatshops), economic advantages to the corporation, and other related ramifications of the growing global contracting structure that is used to increase profits and deflect liability.

Section III introduces the corporate liability theory of joint employment, the origins of the economic realities test, its expansion and adoption into other federal statutory labor schemes, recent trends, and confusion faced by courts in enunciating and applying the test.

Section IV outlines and advocates for the application of the economic realities test as set forth in Usery v. Pilgrim (20) to be adopted by the TVPRA. This Article also discusses the specific importance of specific terms of the global supply contract and examination of the "independent" contractor's situation as crucial factors in the "economic realities" analysis.

Section V sets forth legal arguments based on legislative evidence that demonstrates how and why the economic realities test can be used to substantiate a valid theory of corporate liability in human trafficking and forced labor cases brought pursuant to the TVPRA. This section sets forth the primary legislative tenets that undergird the legal foundation that holds up the economic realities test.

Section VI concludes with suggestions and recommendations. The goal of this Article is to provide practitioners with the necessary tools to persuade courts to apply the economic realities test beyond its traditional applications under federal labor statutes, such as FLSA. (21)

II. GENERAL BACKGROUND

A. Forced Labor Statistics and Background Information

The International Labour Organization (ILO) estimates that "2.5 million people are in forced labor (including sexual exploitation) at any given time as a result of trafficking." (22) Forced labor practices account for at least one-third of all trafficking cases. (23) Despite media outcry against sweatshops, this number does not appear to be decreasing. (24) "A firm's goal is to maximize profit ... [and because] labor is such a large part of business costs, a small increase in the cost of labor can significantly increase the cost of production and decrease profit." (25) Therefore, "employers seek trafficked individuals as a cheaper labour source," which "constitute[s] a vast workforce supporting the global economy." (26) This is nothing new. Throughout U.S. history, Africans were enslaved to work on plantations and European peasants were brought to America "in one of several forms of debt-bondage known collectively as "indentured servitude." (27) Now, as was then, laborers save employers money not only through substandard wages, but also by enabling employers to circumvent the costs of providing health benefits and safe working conditions. (28) Given the globalization and intermingling of the world's economies, the use of trafficked labor is easily hidden, making the worker effectively invisible. (29)

In its defense, the United States has made some good faith attempts to protect workers from oppressive work conditions, including low wages and long hours, and enacted various socially progressive federal labor statutes. Enacted in the 1930s and 1940s, these federal labor law statutes include the National Labor Relations Act (NLRA), (30) the Fair Labor Standards Act (FLSA) (31), and the Social Security Act (SSA). (32) In 2000, Congress culminated these efforts in enacting the Victims of Trafficking and Violence Protection Act of 2000 (TVPA). (33) The TVPA was the first comprehensive act designed to combat the evils of forced labor and sex trafficking. The House approved the law by a suspended rules vote of two-thirds (34) and the Senate unanimously approved it. (35) Furthermore, in 2003, the TVPA was specifically amended to include a civil remedy, creating a path to federal district court for trafficking victims. (36)

Armed with a brand new cause of action, human rights advocates, lawyers, law school students and professors have filed complaints against large corporations that committed human rights abuses related to the production of their products. (37) However, the rate of success has generally been dismally low. (38) Even though Congress created "a private right of action allowing trafficking victims to seek damages and attorneys' fees, and allowing victims access to free legal representation in the pursuit of these claims, ... workers will still encounter heavy barriers when seeking legal remedies under the TVPA." (39) There are several possible reasons for this, including the newness of the statute, lack of awareness, fear of retaliation, and the shortage of attorneys willing to take cases where the likelihood of collecting money damages from traffickers is low, particularly given the limited financial resources of nonprofit legal service providers. (40)

Another reason why success against the deep-pocketed offenders has been so elusive is due to the virtual shield against corporate liability found in the current application and interpretation of the laws in this area. (41) The current TVPRA (and even ATCA before it was severely restricted in the Kiobel decision as discussed above in Section I) decisions have a chilling effect on those who represent trafficking victims against corporate offenders, given the narrow and regressive holdings against corporate liability in district and circuit courts across this nation. (42)

B. History and Evolution of the Global Supply Contracting System

1. Evolution of the Sweatshop

Before the turn of the last century, garments were manufactured primarily in "inside shops." (43) Typically, the operator of such a shop would design the garments, hire production workers who would cut, assemble, and deliver them, and then the operator would market the completed line of apparel. (44)

However, manufacturers started retaining only a portion of garments in these so-called 'inside shops,' and "sent the balance away from their premises to be made by outside sub-manufacturers or contractors." (45) The latter stage became known as the "'outside system of production,' ... [and] ha[d] its genesis in a fiercely competitive struggle by manufacturers of garments ... which caught the workers in the industry, ... depress[ing] their wages and result[ing] in intolerable working conditions." (46) In addition, during this era, as unions became organized and waged aggressive campaigns to better conditions, manufacturers found another good reason to contract all or a part of the work to outside contractors who were "generally were marginal operators without financial resources." (47) Because the outside contractors were also keen to compete for business and accepted contracts with unfavorable terms, their garment workers suffered from low wages and poor working conditions. (48) As one court noted:
   The contractor is an irresponsible go-between for the
   manufacturer, who is the original employer. He has no
   connection with the business interests of the
   manufacturer nor is his interest that of his help. His
   sphere is merely that of a middleman. He holds his own
   mainly because of this ability to get cheap labor, and is
   in reality merely the agent of the manufacturer for that
   purpose. (49)


Collectively, these conditions embody the conditions of employment that are known colloquially as the "sweatshop." (50) The term is not defined in federal law or regulations. (51) The U.S. Government Accountability Office (GAO) describes "sweatshop," as "an employer that violates more than one federal or state labor law governing minimum wage and overtime, child labor, industrial homework, occupational safety and health, workers' compensation, or industry registration." (52) Labor economist Michael Piore defines "sweatshop" as "a specific organization of work" characterized by "very low fixed costs." (53) Because the worker is often paid by the piece, the employer will try to minimize the cost of rent by cramming as many workers as possible into the space. (54) Fixed costs--rent, electricity, heat--are held to a minimum by operating substandard, congested, unhealthy factories, typically overseen by a "sweater" or subcontractor. (55) "The attempt to reduce the rent paid per worker is the chief cause of congestion in sweatshops affecting the way in which material inventories, supplies, equipment, and work-in-progress block aisles and exits. It is also the source of the unhealthy and dangerous conditions ... for which the sweatshop is notorious." (56)

Historian Leon Stein states, "[t]he sweatshop is a state of mind as well as a physical fact ... [t]he sweatshop, whether in a modern factory building or a dark slum cellar, exists where the employer controls the working conditions and the worker cannot protest." (57) Although the term "sweating" referred to a subcontracting system, by the 1890s it was associated with any workplace with oppressively low wages and harsh working conditions regardless of the presence of a labor intermediary. (58) The sweating concept "never lost its original association with the use of subcontractors, but the notion of a sweatshop developed a broader meaning." (59) It is this very concept of subcontracting that has been duplicated with little tweaking by today's multinational corporations, many with elaborate layers of overseas contractors. (60)

2. Adoption by Corporations

Modern corporations have eagerly adopted the global subcontracting system, both to offset liability onto contractors and increase their profits. (61) Many U.S. multinational corporations, notorious for off-shoring their direct labor, also maintain massive global supply chains. (62) The value chain of Cisco Systems, for example, has expanded to the point that it "is almost entirely outsourced with a network of more than 1000 suppliers providing services that include the manufacture, testing, shipping, return, reuse, and recycling" of Cisco products. (63) It is certainly no coincidence that after ten years of global supply chain expansion, Cisco greatly increased its net income by 740% (from July 2001 to July 2011). (64) Yet its operating expenses decreased from fifty-nine percent of total revenue to eighteen percent of total revenue and its cost of sales also decreased from fifty percent of total revenue to thirty-nine percent. (65) As a further example, Caterpillar, Inc. started formal efforts to "increase global sourcing" in "people" in 2003, projecting billions in cost savings. (66) It subsequently reported increased profits of 512% from 2001 to 2011 and decreased operating costs from ninety-four percent of total revenue to eighty-eight percent during the same period, indicating that cheaper overseas labor was a factor in the increase in profits. (67) These numbers, from some of America's most important companies, show a strong correlation between global sub-contracting and increased profits as a result of decreased costs.

Therefore, it is not difficult to see why corporations gravitated to this type of structure and how the "sweatshop" model has become the crux of the subcontracting system for larger manufacturers and corporations. (68) The ability to pass on the costs to third party contractors, while feigning ignorance about what really happens at the factory level, is just too good to pass up. (69) As succinctly stated by Dennis Hayashi:
   Contracting out the production part of their business
   has enabled manufacturers to minimize their
   investment and insulate themselves from instability
   and risk. By characterizing their relationship with
   contractors as independent, they have avoided legal
   responsibility for workers' compensation,
   unemployment insurance and fringe benefits. In short,
   garment manufacturers have preferred contracting for
   two reasons: they can control how much or how little
   contractors are paid, and they can take advantage of
   the prevailing presumption that they are not liable for
   wage violations in their contractors' sweatshops. (70)


3. Corporations taking it overseas

As the protests over "sweatshops" in the United States became more vocal, leading to a deluge of public rallies and boycotts against the evil corporation, (71) big business saw the benefits of a foreign workforce and decided to transfer the problem overseas. (72) In a gradual move overseas, U.S. corporations found a convenient way to enhance their public image along with their bottom line. (73) Today, "instead of hiring workers themselves and risking penalties for paying subminimum wages, brand-name manufacturers subcontract to firms in the underground economy," and are able to diminish the wages of workers guilt-free. (74) In fact, in 2011, fifty-three percent of U.S. manufacturing companies used foreign contractors or agents or partners in the manufacturing of its products. (75)

Moreover, even if there is a discovery of sweatshop conditions overseas, such as the notorious Nike case of abused Indonesian workers by South Korean subcontractors, (76) or the China-Disney case, (77) there is little follow-up or post-outcry investigation. (78) Furthermore, the mechanisms for redress for workers in foreign countries are even less developed and accessible than in the United States. (79) Plaintiffs are foreclosed from seeking relief in countries where they have been trafficked or exploited, since those countries usually have poor, corrupt judicial systems, frequently with complicit government officials. (80) For example, in Vietnam "workers do not have adequate legal recourse to file complaints in court against labor recruitment companies ..." and "diplomats [have been] unresponsive in some cases to complaints of exploitation, abuse and trafficking. Furthermore, government regulations do not prohibit labor export companies from withholding workers' passports and travel documents, a known contributor to trafficking." (81) And, even if victims are able to obtain judgments, the victories are pyrrhic as the contractors are generally judgment proof or evade payment by changing names or dissolving and starting a new corporation, often with the same staff, office and assets the very next day, with no liability under local law. (82) Finally, assuming overseas trafficking victims are fortunate enough to make it to the United States and find a lawyer willing to assist them in seeking justice in our courts--which in many cases is the only viable non-corrupt forum within which to seek relief--their ability to prevail is undermined by the layers of protection insulating the corporation from liability. (83)

4. Existing theories of liability (84)

To date, various theories of liability that have been advanced by plaintiffs to fend off corporate counsels' motions to dismiss have been ineffective. (85) Corporations' arguments are designed to make the judiciary unreceptive to the concept of corporate liability in the international global supply contract. (86) Tactics include minimizing the corporation's alleged control over their far off contractors and exaggerating the potential financial and socioeconomic fallout of holding corporations accountable for their overseas violations. (87) In response, plaintiffs have had to resort to various secondary or vicarious liability theories in attempts to secure liability over the corporations through the actions of their contractors. (88) Generally, one who directly violates a duty imposed by a statute is the primary violator, while a secondary violator is one who assists or supports the primary violator's act or is liable for the act through a relationship with the violator. (89)

There are several popular theories of secondary liability in trafficking and human rights lawsuits. Until recently, plaintiffs frequently utilized the "aiding and abetting" concept under ATCA. (90) Under the ATCA, where plaintiffs are unable to show that a corporation was directly liable for the actions complained of, they would attempt to assert the theory of "aiding and abetting." (91) After years of active litigation and much expected resistance by banks and corporations, courts did come to adopt the concept of "aiding and abetting." (92) And, the "practical engine driving ATS litigation [was] corporate aiding and abetting, or 'complicity,' liability." (93) However, the standard s high. Plaintiffs had to show andprove aiding and abetting. To do so, they had to show evidence of a corporation's intent, or "purposefulness," to engage in conduct that it knew would facilitate or cause serious human rights violations. (94) This is a tall order. The scope of aiding and abetting for tort liability in the civil context required the following:
   (1) the party whom the defendant aids must perform a
   wrongful act that causes an injury; (2) the defendant
   must be generally aware of his role as part of an overall
   illegal or tortious activity at the time that he provides
   the assistance; (3) the defendant must knowingly and
   substantially assist the principal violation. (95)


Most of the relevant ATCA cases involve corporations that have provided support or funding, or contracted with the tortfeasors in cases involving genocide, torture, military attacks and other serious violations of human rights. (96)

As discussed above in Section I, while the Kiobel case has had a severely limiting impact on human trafficking cases, (97) by focusing on the extraterritoriality issue, the Court's ruling did not altogether eliminate these types of claims. If the Court had ruled on that there was no corporate liability under international law, the ruling would have been more devastating (98). Other pending ATCA cases will most likely be amended to demonstrate whether plaintiffs could allege enough relevant US conduct (99) to seat the claims here under the reasoning of Morrison and other decisions applying Morrison to other fact situations and federal laws.

In any case, as discussed above in Section I, application of the ATCA in situations involving extra-territorial acts as a legal mechanism to hold corporations liable for violations of the law of nations, plaintiffs must now look for other possible avenues of relief.

Another theory of secondary liability used by plaintiffs in trafficking cases is that of principal-agent. (100) The goal of this Article is to provide practitioners with the necessary tools to persuade courts to apply the economic realities test beyond its traditional applications under federal labor statutes, such as FLSA. (101), "[w]here one corporation is controlled by another, the former acts not for itself but as directed by the latter, the same is an agent, and the principal is liable for acts of its agent within the scope of the agent's authority." (102) Applying this to the global contracting context, plaintiffs assert that the larger entity (the corporation) is liable for the torts or bad acts of another entity (the contractors), resulting from the privity created between the workers and the corporation.

Satisfying this central requirement of "control" of the corporation over its contractors is particularly challenging in overseas trafficking cases, in which the corporation and contractors are likely separated by an ocean, with most of the trafficking committed directly by a far-off contractor. As a result, Plaintiffs struggle to find concrete evidence of "control" and "authority" over the worker to comply with restrictive common law principles of control. (103) Corporations will simply emphasize the absence of any meaningful connection between the parties, painting it as a typical supplier arrangement. (104) Although this concept has been used in seeking corporate or governmental liability for the actions of subcontractors who committed various human rights violations, including trafficking, the future utility of this theory is still uncertain given the paucity of successful cases. (105)

Finally, some plaintiffs have attempted to use the civil Racketeer Influenced and Corrupt Organizations (RICO) statute to obtain liability over the corporation. (106) On its surface, the RICO statute offers some glitzy benefits: treble damages, compensatory damages, attorneys' fees, and the ability to bring such claims as a Rule 23 class action. (107) However, the use of RICO to prove corporate liability is difficult, time consuming and expensive. The pleading requirements are extensive. (108) Plaintiffs have had their RICO claims dismissed for failure to meet the complicated requirements of proving an ongoing pattern of racketeering activity, that the racketeering predicates are related and that they amount to or pose a threat of continued criminal activity, and at least two predicate acts of racketeering committed within a ten-year period. (109) In the Adhikiri case, even though plaintiffs were able to defend motions to dismiss on the RICO charges, (110) the parties are currently in the midst of summary judgment motions, after enduring an extensive and costly discovery process. (111) Moreover, some defendants may attempt to argue that RICO claims cannot be used to address overseas violations, (112) although there is case law to the contrary. (113)

In light of the legal obstacles associated with most of the available theories of liability, plaintiffs have been forced to cast a wide net. (114) Moreover, defense counsel and courts are often confused by the interplay of secondary liability theories and frequently conflate agency theory with unrelated concepts, such as premise liability. (115) Thus, plaintiffs must educate courts and correct defense counsel when inapt analogies are drawn between these unrelated theories. They must convince the courts, the legislature, the public, the corporations, and even their own clients to look rather at the true economic reality of the worker's economic dependence on the corporation.

Because existing law is ineffective and unclear, victims need a new theory of corporate liability that is legally sustainable, legislatively faithful, accurate, and fair. With these goals in mind, we now turn to the liability theory of joint employment and the economic realities test.

III. ECONOMIC REALITIES TEST

Corporations have been able to deflect most of the liability theories that have been thrown at them, by simply pointing a finger at the direct, physical, day-to-day control of their contractors over the workers in a distant land. (116) With most of the courts steeped in the traditional common law concepts of physical control, it is no wonder that the contractor is considered the only employer. (117) Defendants also continue to torpedo other plausible theories of liability, such as aiding and abetting, that require proof of purposeful intent. (118) Other theories based on contract or tort have proven equally futile. (119) More frustrating is that these unsophisticated victims often blame their deplorable work conditions on those who were physically present at the work site--oblivious of the corporations who control and direct the contractors. (120) Unless there is blatant direct evidence of active wrongdoing, corporations continue to escape accountability. (121) The global supply contracting structure is alive and well, replicated and tweaked with impunity by corporations. While these vicious cycles of cheap and forced labor and corporate profits abound in developing countries overseas, the U.S. has lost about 400,000 service jobs since 2000 and two million manufacturing jobs since 1983. (122)

The economic realities test is a powerful and legally viable test that allows the courts to conduct an examination of dependency factors from the worker's perspective to determine whether the corporation could be liable as a joint employer. (123) As opposed to the traditional common law interpretation of joint employment that focuses only on limited indicia of employer control, this revolutionary test enables courts to look at true economic reality factors that reflect the actual situation. (124)

A. Basic Theory of Joint Employment

If a corporation can be characterized as a joint employer with the contractors it hires to manufacturer its products, the corporation is equally liable to the trafficked workers, thereby relieving plaintiffs from the more difficult burden of having to prove the more attenuated theories of secondary liability. (125) Essentially, the logic is that if the contractor is found to be an employee of a corporation, then its workers are also the corporation's employees. (126) Therefore, even if the contractor claims to be an independent contractor, the court could also find that the contractor was a joint employer with the corporation, making the workers employees of the corporation. (127) Since one theory of liability does not preclude another, plaintiffs can aggressively plead the joint employer theory with all other relevant theories of liability. (128) For example, the fact that a contractor employed the workers does not preclude allegations that the corporation also jointly employed the workers. (129) The issue of joint employment is a question of fact. (130)

The joint employment doctrine is of utmost importance and relevance to the scenario when a corporation hides behind an independent contractor, particularly in sectors that are prone to human trafficking and forced labor. (131) For example, in the agricultural industry, as seen in the Castillo v. Case Farms of Ohio case, the court utilized the joint employment doctrine to prevent the employer from escaping liability. (132) It recognized that "[b]y hiring (and thereby shifting liability to) intermediary 'independent contractors' to recruit and/or oversee workers, agricultural owners have, at times, sought to create a buffer between themselves and their workers.... In the interests of justice, however, courts have frequently 'pierced' this independent contractor 'veil' with the invocation of the 'joint employer doctrine."' (133) Courts developed the joint employer doctrine specifically to ensure that the ultimate employer does not escape liability. (134) Similarly, courts have found growers and their labor brokers who provide migrant farm workers to the growers to be joint employers, (135) and liable for such failures of their co-employers for using pesticide without proper training, (136) of obtaining insurance for the automobile transporting the worker, (137) and to pay wages. (138)

As with the analysis for determining the existence of agency, the question of joint employment is decided under state law. (139) Since there are various state theories, first, this article addresses the joint employment principles, primarily using Texas law. Texas law is used for the following reasons: first, Texas has a well-developed progressive body of case law on the issue of joint employment. (140) Second, the Fifth Circuit's decision in Pilgrim, clearly explicates the economic realities test, has been cited throughout the country and referred to as one of the clearest explications of the economic realities test. (141) Third, Texas federal district courts have made several groundbreaking and frequently cited federal trafficking cases that have experimented with various theories of corporate liability. (142) Fourth, Texas has been one of the primary venues where trafficking victims have sought relief. (143)

Under Texas law, two separate entities can be considered joint employers, regardless of the existence of any partnership relationship between the two of them. (144) An employee may even be found to serve two masters even if they are not "joint" or "co-employers," and "most Texas courts, while not resorting to the theory" of joint-employment, "have acknowledged its viability." (145) Similarly, under the joint employment theory, if an employee receives an injury while working on a project jointly undertaken by two companies, the employee may sue both companies for the injury. (146)

Although there may be variations on existing tests to determine joint employment, they can be lumped into two categories: the traditional "common law" test that focuses on control and authority of the employer over the employee, (147) and the "economic realities" test that focuses on the true economic reality of the situation and dependency of the worker on the corporation. (148) And, over the years, both the common law theory and the economic realities theory test have produced variations on the basic theme. (149) The question then becomes which test to utilize in order to determine whether someone is a joint employer or not. We turn to those two tests now.

B. Common Law Test

Surprisingly, the traditional common law test for determining joint employment is not nearly as well defined as would be presumed given its age and the proliferation of writing on the subject by courts and authors. (150) Although the common law test has been around for over a century, judges still wrestle to "secure precise and ready applications." (151) This was evident in the "difficulties encountered in borderland cases by its reformulation in the Restatement of the Law of Agency [section] 220." (152) In fact, even after years of litigation, there is no "simple, uniform and easily applicable test that the courts have used, in dealing with such problems, to determine whether persons doing work for others fall in one class or the other." (153) Most can agree that the common law test contains "no shorthand formula or magic phrase that can be applied to find the answer,... all of the incidents of the relationship must be assessed and weighed with no one factor being decisive." (154) Indeed, even the Supreme Court recognized that because "courts tended to look to local precedents to determine the common-law standards" this produced "different results for similar factual situations in various parts of the country." (155)

The common law requirements are strict and non-forgiving. The Restatement's definition of the word "servant" (employee) embodies this emphasis: "one who performs continuous service for another and who, as to his physical movements, is subject to the control or to the right to control of the other as to the manner of performing the service." (156) The relationship is defined by "one giving and the one receiving the service, rather than the nature of the service or the importance of the one giving it," and "[t]he rules for determining the liability of the employer for the conduct of both superior servants and the humblest employees are the same." (157) Not surprisingly, the "common law" test is also known as the "control test," since the core analysis focuses on the indicia of control that the employer has over the employee. (158) That issue alone has been the most frustrating roadblock for victims of human trafficking. (159) How do overseas worker substantiate enough physical day to day "control" to demonstrate that the corporation--who sits thousands of miles away in a distant land--is also their employer? It is precisely this rigid test focusing on control that has been espoused and promoted by the corporations. (160)

In the context of this traditional common law test of joint employment, the United States Supreme Court courageously pushed the legal frontier to replace it with a more legitimate and workable test, beyond the one-faceted "control" test. (161)

C. Introducing the Economic Realities Test

1. Powerful but Short-Lived Beginnings: The Hearst Case

For a revolutionary new concept that swept away centuries of established law, the economic realities test has not been used as extensively as it could be in the trafficking and forced labor contexts. (162) This innovative test initially arose in the context of interpreting several federal labor statutes--most notably the NLRA and the FLSA. (163) Although the economic realities test is primarily referred to today as a FLSA test, it actually first grew out of Hearst, a NLRA case. (164) Though years later legislation removed the economic realities test under the NRLA, (165) the court's reasoning is still persuasive, instructive, and controlling. (166) Numerous courts later adopted the Hearst rationale to propitiate the economic realities test to determine joint employment under other federal labor statutes, including the FLSA. (167) The economic realities test still stands strong under the FLSA, many state workmen's compensation acts, the Family and Medical Leave Act, the Worker Adjustment and Retraining Act, Title VII of the Civil Rights Act, the Age Discrimination in Employment Act, and the Americans with Disabilities Act. (168)

In N.L.R.B. v. Hearst Publications, the US Supreme Court flatly rejected the common law test as the mechanism for determining joint employment, instead applying an economic realities test to determine whether newsboys were employees of the newspaper publisher. (169) The corporation argued that the newsboys were independent contractors and not entitled to bargaining rights. (170) The Court conducted an economic realities test, focusing on factors that reflected the "dependency" of the newsboys on the newspaper company. (171) The Court examined and gave great weight to facts such as the newsboys "rely[ing] upon their earnings for the support of themselves and their families, and having their total wages influenced in large measure by the publishers who dictate[d] their buying and selling prices, fix[ed] their markets and control[led] their supply of papers." (172) The Court also noted that the newsboys' "hours of work and their efforts on the job" were "supervised and to some extent proscribed by the publishers or their agents." (173)

Moreover, it is significant that even though the Court noted the existence of a district manager who admittedly "serve[d] as the nexus between the publishers and the newsboys," it still found the newspaper publisher as the employer. (174) Even though the district manager unilaterally determined the number of papers distributed--effectively fixing the compensation--and assigned spots or corners to which the newsboys' selling jobs were confined, the Court believed they were still the newsboys' employer. (175) Unbridled by common law constraints, the Court was able to focus on the more humane side of the story: that the newsboys were "responsible workers, continuously and regularly employed as vendors and dependent upon their sales for their livelihood." (176) The real life factors served as the rightful crux of the inquiry.

In order to justify this innovative holding and new test, the Court adhered to the "terms and the purposes of the statute, as well as the legislative history." (177) The Court relied on the law's stated goals that addressing the inequality between employers and workers, encouraging collective bargaining, and seeking to remedy the individual worker's inequality of bargaining power. (178) Finding the economic realities test a much more suitable vehicle to address the legislative concerns, the Court was empowered to break from the path of least resistance, and pushed aside the common law test as the sole determinant of who was an employee. (179) In sifting through the statute's legislative history, the Court took notice of Senate Reports on that disclosed "clearly the understanding that 'employers and employees not in proximate relationship may be drawn into common controversies by economic forces."' (180) The Hearst court's desire to follow legislative intent is seen in this piercing examination into the statute's history as well as a concern in context, reflecting a method that took "color from its surroundings." (181) The Court created the test with "the mischief to be corrected and the end to be attained" in mind. (182) This perspective enabled the Court to expand the scope of analysis to incorporate national goals and ramifications of the law as declared by the legislators. (183) The Court justified employing the economic realities test since it directly reflected "the policy of the United States to eliminate the causes of obstruction to the free flow of commerce" as stated in the findings and declaration of policy in the Act. (184) Cleverly armed with unequivocal congressional intent, the Court make short shrift of the common law test, denigrating it into "a technical legal classification ... unrelated to the statute's objectives," in favor of the "economic facts of the relation" as a far more effective tool. (185)

It is no surprise that common law conception was swept aside. The continued application of the old doctrine would obviously have limited "the scope of the statute's effectiveness," and not only been inconsistent with "the statute's broad terms and purposes," and could have "ultimately defeat[ed], in part at least, the achievement of the statute's objectives." (186)

Broadening the scope of inquiry permitted the Court to examine the "underlying economic facts rather than technically and exclusively by previously established legal classifications." (187) This interpretation lead to a new edict freeing plaintiffs from the shackles of the "narrow technical legal relation of 'master and servant,' that centuries of courts had reflexively "import[ed] wholesale ... as exclusively controlling limitations upon the scope of the statute's effectiveness." (188)

2. Expansion under other federal statutes

After Hearst, other courts followed suit and expanded the economic realities test to other cases under other labor-related statutes, re-directing their examination of the existence of an employer-employee relationship in the context of the true economic realities of a work relationship, rather than narrow and technical classifications of employee and employer under common law. (189)

Courts adjudicating the issue of joint employment or the question who is an "employee" under the Fair Labor Standards Act of 1938, enacted on June 25, 1938, and the Social Security Act of August 14, 1935, found the Hearst analysis and methodology persuasive in defining the coverage of the employer-employee relationship under other similar statutes. (190) The legislative history of the FLSA as set forth in Section 2(a) of the Act minces no words in tying the welfare of the worker to the burden on interstate commerce, succinctly stating that:
   The Congress hereby finds that the existence, in
   industries engaged in commerce or in the production of
   goods for commerce, of labor conditions detrimental to
   the maintenance of the minimum standard of living
   necessary for health, efficiency, and general well-being
   of workers (1) causes commerce and the channels and
   instrumentalities of commerce to be used to spread and
   perpetuate such labor conditions among the workers of
   the several States; (2) burdens commerce and the free
   flow of goods in commerce; (3) constitutes an unfair
   method of competition in commerce; (4) leads to labor
   disputes burdening and obstructing commerce and the
   free flow of goods in commerce; and (5) interferes with
   the orderly and fair marketing of goods in commerce. (191)


Following the Hearst example of utilizing clear and decisive legislative intent to direct their legal analysis, other courts confidently expanded the economic realities test to fulfill correspondingly similar legislative mandates. (192) Naturally, a statute with the clearly stated purpose of denying a competitive advantage to employers who use substandard labor conditions meant a huge blow to the corporations. (193) The new examination through the dependency lens of the worker--instead of the control indicia of the employer--meant that the corporate world could no longer manipulate the physical manifestations of control. (194) And dirty secrets, like the subcontracting game, could be exposed in the courts for what they truly were. (195)

In the Rutherford case, one of the first and most well-known FLSA cases to adopt the "economic realities" test, the Supreme Court staunchly justified its holding by relying upon the legislative goals of the FLSA. (196) The Court first acknowledged the legislative goals of FLSA to reduce the distribution in commerce of goods produced under subnormal labor conditions (i.e. conditions that were detrimental to the health and well-being of workers) by eliminating low wages and long hours detrimental to the health and wellbeing of workers. (197) Armed with this strong legislative arsenal, the Court justified and applied the economic realities test to the case of meat "boners." (198) The manufacturer unsuccessfully attempted to push the blame and responsibility onto a third party contractor, claiming that the contractor was the immediate supervisor, but the court found the corporation, Kaiser, was the boners' employer. (199)

The Rutherford court appeared to tweak and expand the economic realities test by evaluating the existence of a joint employment relationship "upon the circumstances of the whole activity." (200) Without using the words "dependency" or "dependent" in its opinion, the Rutherford court conducted a dependency analysis. The court examined the following factors and found them significant: the fact that the workers performed a specialty job on a production line, that the premises and equipment belonged to the corporation, their pay was more like piecework and not dependent on any initiative on the part of the workers. (201) Rejecting a knee-jerk application of the common law indicia of control, the Rutherford court looked at the specifics of the work, examining and evaluating the task of the boners as one "performed in its natural order as a contribution to the accomplishment of a common objective," and found them to be dependent on the meat packing corporation, not just the contractors. (202)

The Supreme Court extended and honed the economic realities test in defining who qualified as an employee for purposes of the Social Security Act of 1935 (SSA), another federally enacted example of social legislation during the same era as the FLSA and the NLRA. (203) The SSA was enacted to protect workers from poverty by requiring employers to pay taxes earmarked for future compensation to workers during periods of unemployment. (204) In particular, "[t]he [SSA] was the result of long consideration by the President and Congress of the evil of the burdens that rest upon large numbers of our people because of the insecurities of modern life, particularly old age and unemployment ... [and] was enacted in an effort to coordinate the forces of government and industry for solving the problems." (205)

In a much-cited economic realities test case, United States v. Silk, a railway company refused to pay unemployment taxes for men who unloaded its railway cars, claiming they were not employees, but independent contractors. (206) Here, the Court rejected the traditional common law test, reviewed the case through the legislative lens of the SSA, and applied dependency test to determine the true economic reality of the worker. (207) First, it noted that the relevant law's aimed to eradicate "the evil of the burdens that rest upon large numbers of our people because of the insecurities of modern life, particularly old age and unemployment." (208) Deciding that protection of the railway car un-loaders was consistent with the Act's intent, the Court found them to be employees of the railway. (209) The Silk court applied a dependency test using five factors: "degrees of control, opportunities for profit or loss, investment in facilities, permanency of relation, and skill required in the claimed independent operation," as the basis for analysis. (210) The Court quickly concluded the un-loaders were employees, noting that these workers "provided only picks and shovels," and "had no opportunity to gain or lose except from the work of their hands and these simple tools." (211)

Although one could ostensibly argue that the first factor--degree of control--appears to harken a regression back to the days of the traditional master-servant common law analysis, the court interpreted the word "control" broadly, including both indirect and direct means of control, and did not confine itself to the traditional physical control test. (212) Moreover, the issue of control was only one of several factors for analysis. Furthermore, the Silk court appeared to examine the prongs with the perspective of worker dependency in mind. (213) It is also significant that the Court critically examined the employment contract with an eye to protecting the worker, rebuking the corporation for trying to shift tax liability to the contractors by contract, "however 'skillfully devised."' (214)
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Title Annotation:I. Introduction through III. Economic Realities Test C. Introducing the Economic Realities Test 2. Expansion Under Other Federal Statutes, p. 255-292
Author:Bang, Naomi Jiyoung
Publication:Houston Journal of International Law
Date:Mar 22, 2013
Words:7936
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