Old-Fashioned Jobs: Working FOR Others

Employment laws have mostly been created to balance the relationship between “master” and “servant.”  Employment laws recognize that employees are vulnerable because they are dependent on and work under the control of employers.  Employment laws give certain rights to employees, like the right to minimum wage, to reasonable work hours, to a safe and health workplace, to protection from discrimination, to compensation for workplace injuries, etc.

 versus…

Cooperatives: Working WITH Others

Now how do employment laws apply when you form a cooperative to work with others, rather than for others?  You might think employment laws no longer apply, but, actually, they often do!  Employment laws are designed to cover as many people as possible, so that no workers are left unprotected by a loophole.  The safe thing is to assume that everyone working for a cooperative is an employee, and then work backward from there to see if you can find any exceptions.

 

What Does it Mean to Have Employees?

Having employees comes with a list of obligations and requirements, including:

  • Paying minimum wage and overtime;
  • Complying with standards for hours and working conditions;
  • Withholding of payroll taxes and other withholdings;
  • Maintaining workers compensation insurance;
  • Complying with occupational safety and health laws;
  • Verifying eligibility to work in the U.S.;
  • Posting of certain kinds of notices and posters related to employees rights; and
  • Adhering to certain recordkeeping requirements.

However, if someone is not an employee, most of those requirements do not apply.

Who is NOT an Employee?

There are four primary legal categories of workers that are not considered employees, and here are some basic explanations of what each is:

1)      Volunteers = People that do work for charitable, religious, or humanitarian benefit.

2)      Interns = People that do work for their own educational or therapeutic benefit.

3)      Independent Contractors = People that do work for others in an independent manner.

4)      Partners = People that work together as relative equals for their own and mutual benefit.

 Who Can Be Considered a VOLUNTEER?

As a general rule, you CANNOT volunteer for a for-profit business unless you can be classified under one of the other three categories below (interns, independent contractors, or partners).  But as a general rule, you CAN volunteer for nonprofit organizations that are engaged in charitable, religious, or humanitarian purposes.  Most cooperatives will not meet the definition of “charitable, religious, or humanitarian,” unless they are nonprofit organizations that are tax exempt under 501(c)(3) or 501(c)(4).  Most childcare cooperatives are 501(c)(3) nonprofits.  Now here are some extra rules and exceptions to the rules:

 1)      You MIGHT be able to volunteer for a for-profit business if it has a defined and separate charitable project:  Let’s say you have a cooperative café and once per month it opens up to the public and serves only free food to people in need.  This is a grey area, but this may be a situation where members of the public could come in and volunteer.  If the café has regular employees however, those employees probably could not volunteer, because the work may be too similar to the work they normally do for pay.

 2)      You MIGHT NOT be able to volunteer for a nonprofit if it is operating a commercial enterprise serving the general public.  This is also a grey area, because many high profile nonprofits, such as Girl Scouts, allow volunteers to sell things to the public.  But the rule stated by the Supreme Court and California law is: People cannot volunteer for “ordinary commercial activities” that “serve the general public,” even if those activities are operated by and for the benefit of charities and religious organizations.1

 3)      “Paying” volunteers with food or other valuable perks might mean they are employees:  The rule expressed by the Department of Labor and in Fair Labor Standards Act (FLSA) is that people are allowed to volunteer so long as it is “without promise, expectation, or receipt of compensation for the services rendered, although a volunteer can be paid expenses, reasonable benefits, or a nominal fee to perform such services.”2  So you can give your volunteers a little something, but not a lot.3

Who Can Be Considered an INTERN?

For-profit businesses can have unpaid interns, so long as the arrangement in which the intern is working meets the criteria for a valid internship.  In California and in most jurisdictions, the following criteria are considered in determining who is an intern (also known as trainee or student):

 1)      “The training, even though it includes actual operation of the employer’s facilities, is similar to that which would be given in a vocational school;

2)      The training is for the benefit of the trainees or students;

3)      The trainees or students do not displace regular employees, but work under their close observation;

4)      The employer derives no immediate advantage from the activities of trainees or students, and on occasion the employer’s operations may be actually impeded;

5)      The trainees or students are not necessarily entitled to a job at the conclusion of the training period; and

6)      The employer and the trainees or students understand that the trainees or students are not entitled to wages for the time spent in training.”4

The Importance of Being Unhelpful

Most businesses struggle especially with fourth criteria in the internship test, which is the requirement that “the employer derives no immediate advantage from the activities of trainees or students, and on occasion the employer’s operations may be actually impeded.”  Some businesses do seek interns for the sole purpose of providing an educational experience, but let’s be real: Most employers hope that interns will also be helpful to the enterprise, and the framing of this law makes that hard.  It’s difficult to know where courts will draw the line, and we are left to wonder: can’t an intern be just a little bit helpful?  Fortunately, one case decided by the 9th Circuit Court of Appeals seems to indicate that intern can be helpful, as long as the intern is the true beneficiary in the relationship.5  Note, however, that this remains a grey area, and if your cooperative would like to have interns, it’s best to focus primarily on teaching them.

How to Have an Intern

Given the limitations on how interns can work in enterprises, here are some recommendations on how to create an internship program:

1)      Create a curriculum to accompany the work: This helps to meet the requirement that the training be “similar to that which would be given in a vocational school.”

2)      Implement a systematic training program whereby interns will be exposed to nearly every aspect of running the business:  If an intern is exposed to multiple aspects of running the business, it means that they will not spend a significant amount of time repeatedly doing one task.  This helps to undermine any argument that the employer is benefiting from the intern’s work, since the intern never has the opportunity to be that helpful on any one task, and the employer is constantly training the intern in a different facet of the business.

3)      Limit the amount of time that interns spend doing mindless tasks or work normally done by employees:  In the case of a farm, for example, an intern should not spend a significant amount of time planting, weeding, or harvesting a field, but may do this work on a limited basis, for the purpose of developing basic skills.  It is better to engage the intern in projects somewhat separate from the day-to-day work of the business. This helps to prevent any argument that the intern is displacing an employee. 

4)      Create an affiliation with an educational institution or nonprofit:  If a business serves as an educational laboratory for school or university students, this helps to create a clearer educational purpose to the work an intern does with the enterprise.

Who Can Be Considered an INDEPENDENT CONTRACTOR?

Independence and cooperation sound somewhat like opposites, but they are actually closely intertwined in a cooperative economy.  Through cooperative production, cooperative marketing, cooperative ownership of equipment, and cooperative purchasing of supplies and services, many small-scale and independent enterprises can access economies of scale usually  harnessed only by big businesses.  When multiple independent entrepreneurs come together and form a producer, marketing, and/or purchasing cooperative, the relationship between the entrepreneurs and the cooperative is usually one of independent contractors, but beware there are some grey areas.

The test for who is an independent contractor looks a little different, depending on your jurisdiction, but one U.S. Supreme Court6 opinion summed up the factors that are weighed together in determining who is an employee versus who is an independent contractor:

 1)      The hiring party’s right to control the manner and means by which the product is accomplished.

2)      The skill required;

3)      The source of the instrumentalities and tools;

4)      The location of the work;

5)      The duration of the relationship between the parties;

6)       whether the hiring party has the right to assign additional projects to the hired party;

7)      The extent of the hired party’s discretion over when and how long to work;

8)      The method of payment;

9)      The hired party’s role in hiring and paying assistants;

10)   Whether the work is part of the regular business of the hiring party;

11)   Whether the hiring party is in business;

12)   The provision of employee benefits; and

13)   The tax treatment of the hired party.

If a group of independent home bread bakers forms a cooperative to jointly market their breads and to collectively purchase ingredients, a court would likely find that bread bakers are not employees of their cooperative, so long as the bakers work in their own homes, use their own appliances, hire their own assistants, set their own hours, decide on the manner in which they bake, and have the freedom to sell bread elsewhere.

However, if an autocratic manager or board of the cooperative began to exert more control over each baker, the relationship might change.  If the cooperative dictates how much each baker must produce, sets specifications for ingredients, and fixes prices on the breads of all bakers, and if one manager has the power to “hire and fire” bakers, this could potentially be ruled to be an employment relationship.  This was essentially the outcome of the Supreme Court’s 1961 ruling in Goldberg v. Whitaker House Cooperative, Inc.,7 where 200 home-based clothing manufacturers (primarily women engaged in knitting and embroidery) joined a cooperative and sold clothing items to the cooperative.  The Court determined that an employment relationship existed, due to the level of control the cooperative had over each member’s work (dictating design, order size, timing, payment, and other terms of work).

The moral to the story is that if multiple independent entrepreneurs, such as health care practitioners, gardeners, or food artisans, come together to form a producer, marketing, or purchasing cooperative, it’s very important to look at the various factors listed above to determine whether the relationship is more like an independent contractor relationship or an employer/employee relationship.  If it’s the latter, then congratulations, you may have created a worker cooperative!  However, see the next section to learn more about when workers in a worker cooperative need to be treated as employees.

Who Can Be Considered a PARTNER?

Employment law does not apply when there is truly no master/servant relationship.  It is widely accepted that if you start a sole proprietorship and work for yourself, you are not your own employee.  Now how does that apply when two people own, manage, and work for their own business in partnership with one another?   How about when 100 people own, manage, and work for their own business?  And does it matter what kind of business entity it is – a partnership, LLC, cooperative corporation, or other corporation?

Let’s start with the question of what is a master/servant relationship.  Strong precedent was created in answer to the question when the U.S. Supreme Court decided the case of Clackamas Gastroenterology Associates, P.C.  v. Wells in 2003.8  There, the Court was asked to decide whether the Americans with Disabilities Act applies to working shareholders of a small professional corporation.  The Court then adopted the following guidelines for determining when a master-servant relationship exists:

1)      Whether the organization can hire or fire the individual or set the rules and regulations of the individual’s work;

2)      Whether and, if so, to what extent the organization supervises the individual’s work;

3)      Whether the individual reports to someone higher in the organization;

4)      Whether and, if so, to what extent the individual is able to influence the organization;

5)      Whether the parties intended that the individual be an employee, as expressed in written agreements or contracts;

6)      Whether the individual shares in the profits, losses, and liabilities of the organization.

Note that not every court or labor law agency will apply the same test, and there are many tests that have been developed for determining who is a partner to an enterprise.  Another case that summarized the factors courts consider is Simpson v. Ernst & Young, decided by the 6th Circuit in 1996.9  The court named the following factors as relevant to the determination:

1)      The right and duty to participate in management;

2)      The right and duty to act as an agent of other partners;

3)      Exposure to liability;

4)      The fiduciary relationship among partners;

5)      Use of the term `co-owners’ to indicate each partner’s `power of ultimate control;’

6)      Participation in profits and losses;

7)      Investment in the firm;

8)      Partial ownership of firm assets;

9)      Voting rights;

10)   The aggrieved individual’s ability to control and operate the business;

11)   The extent to which the aggrieved individual’s compensation was calculated as a percentage of the firm’s profits;

12)   The extent of that individual’s employment security; and

13)   Other similar indicia of ownership.

 Does it make a difference if you form a partnership, LLC, or cooperative corporation?

In some jurisdictions and under some statutes, courts have leaned heavily toward the assumption that shareholders of corporations are employees when they work for the corporation they co-own.10  This assumption has caused stress for California worker cooperatives, which are generally formed as cooperative corporations.  If there is an assumption of an employer/employee relationship from the moment of incorporation, this means that cooperatives must have enough start-up capital to pay members minimum wage, obtain workers compensation, and so on.  The Catch-22 is that most workers cooperatives have great difficulty raising that much start-up capital, due to the reluctance of banks to loan or of individuals to invest.  This means that most worker cooperatives must bootstrap their business, and work for little or no pay in the beginning, like most partners to a start-up business do.  Some worker “cooperatives” choose to form instead as partnerships or limited liability companies (LLCs)11 in order to avoid application of employment law to members.

The simple fact of incorporation, in the eyes of some courts and agencies, is enough to establish a presumption that the shareholder is separate from the entity, and therefore cannot be considered a partner.  California attorney Neil A. Helfman has written about this in his 1992 article “The Application of Labor Laws to Workers’ Cooperatives.”12 Mr. Helfman writes:

 “As the law presently stands, it looks at form over function. The fact of incorporation may have more bearing upon the determination of an employment relationship, than the actual relationship between the parties. A worker in an incorporated cooperative who has managerial authority, for example, may be considered an employee just because the business is incorporated; while a junior partner of a thousand-partner accounting firm, who is under the control of others, is not. The rationale for this distinction is not entirely clear; one explanation is that in the former, worker members are providing services to an entity. For example, in the Matter of Construction Survey Cooperative (Case No. T-62-3) (1962)) before the California Unemployment Insurance Appeals Board, members of a workers’ cooperative were held not to be employees. In that case, member workers received compensation on the basis of their contributed labor. By common consent, the activities of the cooperative were directed by a manager, although ultimate authority for managerial decisions rested with the membership.  The appeals board found the workers to be principals of the cooperative, and held that under California law that it was incompatible for them to be employees of their own organization. When presented to the Employment Development Department, EDD representatives took the position that if the entity were incorporated, workers should be considered employees even if no other facts had changed.”13

The good news is that the U.S. Supreme Court, in the Clackamas case, has since rejected the de facto assumption that the formation of a corporation should determine employment status.14 The Clackamas Court’s rejection of the presumption acts as powerful precedent, which may even serve to relieve California worker cooperatives of the automatic presumption of employment relationships, at least for the purpose of some employment laws (see more below).  Be careful, however; it is not clear whether Clackamas is mandatory precedent in all areas of employment law.

The Clackamas ruling is not unique; other courts have found that a “partnership” relationship exists even when the entity is a corporation.15  The court in Godoy v. Rest. Opportunity Ctr. of New York, Inc. also held that the members of a worker-owned cooperative were “partners,” in spite of the fact that they were working under a corporation.16   Many courts may ultimately consider the incorporation status of an entity as relevant, but only as one factor among many in determining whether an employment relationship exists.

The lesson here is: If you are planning to form and work for a cooperative corporation in California or a state that has applied similar rules, tread very carefully in determining whether you are an employee, and talk to a lawyer.

How much control must each cooperative member have in order to be considered a “partner” under employment law?

 

If all members of a small worker cooperative serve on the Board of Directors and take part in collective decision-making process, then, arguably, each member could be considered a “partner” for the purpose of some employment laws.  But where do courts draw the line?  How much control do the workers need to have in order to be considered partners?

One case that examined the question of who is a “bona fide partner” is Wheeler v. Hurdman, decided by the 10th Circuit in 1987.17  In that case, the court actually de-emphasized the need for each partner to have a significant amount of control, noting that the practical needs of the business may result in partners giving up a certain amount of control over the day-to-day, and abdicating such control to managers, teams, or committees.  The court essentially recognized the following practical reality: Any time a group of people voluntarily works together, each individual gives up a certain amount of control to the group or to members of the group.

In another case, Fountain v. Metcalf, Zima & Co., the court focused on certain voting rights as the indicator of control, and not on the actual realities of management in the firm.  There the court ignored the argument that a managing partner was running the firm autocratically, and focused instead on the fact that the plaintiff partnerhad a right to vote his thirty-one percent ownership on member/shareholders’ amendments to the agreement, on admission of new member/shareholders, on termination of relationship with member/shareholders, on draws, and on distribution of profits and income.”18

In contrast to Wheeler and Fountain, however, other courts have focused heavily on the issue of control, and found that factor to be a deal-breaker.  For example, the court in Caruso v. Peat, Marwick, Mitchell & Co. 19 examined the employment status of a partner in a 1350-member accounting firm, and the court looked at three primary factors:

1) the extent of ability to control and operate the business

2) the extent to which compensation is calculated as a percentage of the firm’s profits

3) the extent of employment security.

On the question of “ability to control and operate the business” in the Caruso case, it was significant that the firm was “managed by a board of directors separated from plaintiff by six levels of hierarchy” and that the plaintiff tended to seek approval of management-level partners in decisions about his own work.  The court held that the plaintiff was, indeed, an employee.

The Court in Clackamas also focused heavily on the question of control and common law definitions of the master-servant relationship. The Court wrote:

“[i]f the shareholder-directors operate independently and manage the business, they are proprietors and not employees; if they are subject to the firm’s control, they are employees.”20

Another case that examined this issue specifically in application to a worker cooperative was Wirtz v. Construction Survey Cooperative, decided by a federal district court in Connecticut in 1964.21  In that case, the court emphasized numerous elements in support of a finding that the cooperative members were not employees.22 Even though two members of the cooperative exercised management over the others:

“It is true [that two members] exerted some measure of leadership over the [other members]. But the Court finds this was due to their longer experience, more extensive knowledge, and driving interest rather than due to positions of control or power. What little guidance they supplied was by consent not authority.”23

The lesson with all these cases is: there is no clear set of rules to determine when members of a worker cooperative are employees.  Some of the cases described above indicate that, even with somewhat hierarchical management structures, working co-owners of a business may still avoid classification as employees.  However, if you want to argue that members of your worker cooperative are not employees, then the safest thing to do is to:

1)      Have all members serve on the Board of Directors.

2)      Make decisions by a consensus process or with supermajority voting; this arguably gives each member a strong voice in each decision.

3)      Give each member a lot of control over their own work, or create many semi-autonomous departments or committees that control their own work, procedures, and hours.

4)      Make it somewhat difficult to fire people, by requiring a vote of a large number of members.

5)      If you put some people in a position to manage and supervise others, ensure that they can easily be moved out of their supervisory roles by a proposal brought to the cooperative by the people they supervise.

You Should Really Check With a Lawyer

Now that you’ve read all of the information above, you probably feel like you’ve gone to law school!  But even with the detailed lists we’ve provided above, it can sometimes be very hard to determine who is an employee versus who is a partner, volunteer, intern, or independent contractor.  And it can be hard to determine who exactly needs to be covered by workers compensation insurance or subject to overtime rules.  The ultimate answer may lie in a grey area and the best way to answer it is to look at court cases that have examined similar situations. That is where a lawyer can be helpful to you in determining how to legally categorize someone working in your cooperative.

Who Enforces Employment Laws?

At the California state level, the Department of Industrial Relations, Division of Labor Standards Enforcement (DLSE) is the primary body that enforces wage and hour laws, child labor laws, etc. The Division of Occupational Health and Safety (Cal/OSHA) and the Division of Workers’ Compensation (DWC) also play a role in enforcing employment-related laws and regulations.  The Department of Fair Housing and Employment protects employees from discrimination.  In addition to the state-level agencies, agencies operate at the federal level to enforce similar laws.  Although it is somewhat rare, employment law agencies may audit a business and fine it for violations.  Most of the time, however, employment laws are enforced by workers that bring claims for back wages, health and safety violations, or some other complaint.

Our Cooperative Members Might Be Employees….Now What?

Being an employer comes with a lot of responsibly – both to employees and to the government. For a more thorough guide to your responsibilities as an employer, we recommend the book “The Employer’s Legal Handbook,” published by Nolo Press.  In the meantime, here are a few of the basic responsibilities, and some thoughts about how these rules apply to worker cooperatives in particular.

Obtaining Workers’ Compensation

Employers in California are required to get workers’ compensation insurance, even if they only have one employee.  When a worker suffers an injury, illness or death because of work, worker’s compensation insurance can provide medical care, temporary disability benefits, permanent disability benefits, supplemental job displacement benefits or vocational rehabilitation and death benefits.

More info: See the California Department of Industrial Relations website for a more detailed explanation of worker’s compensation insurance and links to relevant forms. (www.dir.ca.gov/dwc/employer.htm) You can find a worker’s compensation fact sheet for employers at the link below. (www.dir.ca.gov/dwc/FactSheets/Employer_FactSheet.pdf)

How to Get Coverage:  You can get coverage through an agent or broker for a private insurer.  Insurance Brokers & Agents of the West can help you select a broker (Visit: www.ibawest.com).  You can also get insurance through the State Compensation Insurance Fund (State Fund), a division of the California Department of Industrial Relations (Visit: statefundca.com).

Cost: The cost of workers’ compensation will depend on a number of things, such as how many employees you have and the type of work they are doing.  Prices differ depending on the insurer or broker, so you should shop around.  Generally, workers’ compensation can run between 10 to 20 percent of the wages you pay your employees.

Are worker cooperative exempt from the requirement to carry workers compensation?

In some cases, worker cooperatives will be exempt from the requirement to carry workers compensation, even if they do consider their workers to be employees for some purposes.  The California Labor Code requires that all employees be covered by workers’ compensation insurance; however, Section 3351 provides (emphasis added):

“Employee” means every person in the service of an employer under any appointment or contract of hire or apprenticeship, express or implied, oral or written, whether lawfully or unlawfully employed, and includes:

[…]

 (c) All officers and members of boards of directors of quasi-public or private corporations while rendering actual service for the corporations for pay; provided that, where the officers and directors of the private corporation are the sole shareholders thereof, the corporation and the officers and directors shall come under the compensation provisions of this division only by election as provided in subdivision (a) of Section 4151.

[…]

 (f) All working members of a partnership or limited liability company receiving wages irrespective of profits from the partnership or limited liability company; provided that where the working members of the partnership or limited liability company are general partners or managers, the partnership or limited liability company and the partners or managers shall come under the compensation provisions of this division only by election as provided in subdivision (a) of Section 4151.

Thus, in the case of a cooperative corporation, if the directors of the nonprofit are the only members (meaning they are the only “shareholders”) of the cooperative, then they may not need to be covered by workers’ compensation.  Most worker cooperatives that are managed collectively meet this requirement.  However, if there are co-op members that do not serve on the Board of Directors, then it’s possible that workers compensation will be required for everyone.  Note that a worker cooperative that hires non-member employees will definitely need to carry workers compensation for those employees. Note also that a worker cooperative that chooses to form as a partnership or LLC will also be exempt from carrying workers compensation if the working partners/members all participate in management.

Paying Minimum Wage

Wage laws require an employer to pay at least minimum wage, which is currently $10.00 per hour in California and may be higher in certain cities such as San Francisco, Berkeley, and Oakland.  The Fair Labor Standards Act (FLSA) is the main federal law that affects workers’ pay.  California Labor Code 1171 is the main state law related to wage requirements.

Withholding Wages from Worker Cooperative Members for the Purpose of Capital Contributions

Frequently, worker cooperatives require that members make a contribution of capital in order to become a member. In some cases, the worker cooperative withholds money from the member’s paycheck each pay period, in order to complete the capital contribution. This memo describes the laws that govern when and how an employer may withhold wages for this purpose.

Complying With Overtime Laws

The law also requires an employer to pay a worker extra for overtime work and comply with other rules regarding work hours, unless the worker can be considered an “exempt” employee.  Generally, employees are exempt from overtime rules if they engage in certain categories of work, such as managerial, administrative, or professional work. California overtime rules can be found in Labor Code Sections 500-558.  More information about determining overtime requirements can be found at: http://www.dir.ca.gov

Are worker cooperative members subject to overtime rules?  This is a grey area and courts and labor agencies have yet to provide clear enough guidance.  It may be hard for worker cooperative members to argue that they are exempt from overtime on the more typically invoked grounds that they are all managers or executives, since the law in such cases generally requires that the managers and executives be in a position to manage, direct, and supervise other people.

However, some leaders in the cooperative movement have argued quite persuasively that overtime rules should not apply to worker-owners of cooperatives/collectives, since such application would contradict the intent of the overtime laws.  Overtime rules should apply to non-member employees of cooperatives, and in cases where worker-owners can be compelled by supervisors to work overtime.  However, overtime rules do not make sense in the context of a true collective, where workers set their own hours by consensus.  Here is cooperative advocate and attorney Tim Huet’s explanation of this:

“Perhaps the clearest indication of the legislature’s intent in passing the Eight-Hour-Day Restoration and Workplace Flexibility Act of 1999 is in the legislative findings underpinning the Act:

 (c) Ending daily overtime would result in a substantial pay cut for California workers who currently receive daily overtime.

(d) Numerous studies have linked long work hours to increased rates of accident and injury.

(e) Family life suffers when either or both parents are kept away from home for an extended period of time on a daily basis.

It is evident that the design of the overtime law is to discourage employers — through the financial disincentive of premium pay — from requiring employees to work extended hours, with the attendant hazards to body and family.  The logic of the financial disincentive is sound as long as premised on the idea of an employer ordering an employee to work extended hours; the logic fails when a worker is responsible for her or his own scheduling since, under those conditions, premium pay becomes an incentive to work extended hours.  If compulsory overtime is applied to members, I, as a member of a cooperative, would be giving myself a 50% pay increase by scheduling myself to work longer than eight hours.  I would be giving myself a 100% raise by continuing to work beyond twelve hours.  And I have no supervisor to tell me to go home.  There would be powerful incentive to work longer hours, even at the risk of injury/accidents and at the cost to family life.  The effect would be the exact opposite of that intended by the legislature. 

Moreover, the internal dissension caused by members voluntarily scheduling themselves for overtime, and thereby giving themselves sizeable pay raises outside the collective process, would result in the demise of our freedom to self-schedule – and would push us towards surrendering a measure of our democracy in favor of having supervisors to schedule and enforce work hours.  While an employee arbitrarily scheduling himself for overtime might be soaking an adversarial employer, a member would be taking money from his co-members/co-owners.  The legislature’s finding that “{e}nding daily overtime would result in a substantial pay cut for California workers who currently receive daily overtime” makes sense in the context of employer-employee relations; its logic does not carry in the cooperative context where any financial surplus left after paying wages, benefits, etc. reverts to the members in the form of patronage.  Indeed overtime premiums would reduce member income through increasing our workers compensation payments and other payroll-related costs.

Clearly the intent of compulsory overtime pay is to “protect” otherwise defenseless employees from being required to work overtime by an employer who might wish to exploit them.  Where workers have some other form of protection or need no protection, the government has refrained from intervening.  The Act in question provides a mechanism by which workers under a collective bargaining agreement can “opt-out” of the overtime scheme provided, as long as some premium pay is provided.  Under a collective bargaining agreement, the rate of premium pay could be nominal – perhaps even fractions of a penny (see DLSE memorandum of 12/23/99:  “The amount by which the premium exceeds the regular rate is left to the parties to negotiate; we will recognize any rate higher than the regular rate as a premium.”).  One can only conclude that the legislature was willing to rely on the power of the unions involved to protect their members and express their hours preferences.  It stands to reason if a union with limited power is left to negotiate premium pay that cooperative members-owners – who hold ultimate power and need not negotiate with anyone — would be left to devise their own schedules and pay.”

Complying with Meal, Break, and Time Off Requirements

Employers must comply with rules governing breaks and meal periods during the work day.  Employers must provide non-exempt employees one day off per week, and provide a 30-minute meal break for any shift of 5 hours of more, and a 10 minute break for every 4 hours worked, with a few exceptions.  For more info, see: http://www.dir.ca.gov/dlse/FAQ_MealPeriods.htm

Are worker cooperative members exempt?  For some of the same reasons that some people argue that worker collective members should be exempt from overtime, they may also be exempt from meal, break, and time off requirements.  Remember, this is a grey area, so the safest thing to do is to schedule breaks for cooperative members.

Deducting Payroll Taxes and other Withholding

An employer is required to withhold money from each employee’s paycheck for federal and state income taxes, social security tax, Medicare tax, and unemployment tax.  The California Employment Development Department provides state payroll tax services and information on their website here:  http://www.edd.ca.gov/Payroll_Taxes/default.htm

An employer can also withhold money from an employee’s paycheck for health, welfare, or pension contributions – but only with the employee’s consent.  The State rules on deductions can be viewed here: http://www.dir.ca.gov/dlse/faq_deductions.htm

Worker cooperatives and withholding from patronage dividends:  Note that, for worker cooperatives, the law remains somewhat unclear as to whether the cooperative must withhold from and pay payroll taxes on patronage dividends.  See Gregory Wilson’s article on this subject.24  The IRS has yet to issue clear guidance on this, and in the meantime, most cooperatives do not treat patronage dividends as employment income for the purpose of withholding.

Providing Safe Working Conditions and Complying with Safety Standards

The Occupational Safety and Health Act (OSHA) requires an employer to provide a safe workplace free from hazards that could likely cause serious physical harm to employees.

Employers MUST also:

  • Inform employees about hazards through training, labels, alarms, color-coded systems, chemical information sheets and other methods.
  • Keep accurate records of work-related injuries and illnesses.
  • Perform tests in the workplace, such as air sampling required by some OSHA standards.
  • Provide hearing exams or other medical tests required by OSHA standards.
  • Post OSHA citations, injury and illness data, and the OSHA poster in the workplace where workers will see them.
  • Notify OSHA within 8 hours of a workplace incident in which there is a death or when three or more workers go to a hospital.
  • Not discriminate or retaliate against a worker for using their rights under this law.

OSHA’s resources for small businesses: http://osha.gov/dcsp/smallbusiness/index.html

Free consultations: OSHA also provides free consultations and advice to small businesses to help businesses comply with the OSHA regulations.  You can call the toll-free number, or you can call the local office to set up a consultation or get advice.  Cal/OSHA Consultation toll-free number 1-800-963-9424.

Posting notices: OSHA requires that you post a notice called “Job Safety and Health Protection” for employees to see. The notice is available for free online, or you can get one from the nearest OSHA office.  http://www.osha.gov/Publications/osha3165.pdf

Logging injuries: All businesses with 11 or more employees must keep a log of all workplace injuries and illnesses.  This log must be available for employees to see, and any incident must remain on the log for at least 5 years.

Allowing Employees to Unionize

The National Labor Relations Act (NLRA) protects the right of employees to organize unions and collectively bargain with employers.

Does NLRA apply to members of worker cooperatives?  The NLRA protects employees, and whether this applies to members of worker cooperatives depends on the ways courts have interpreted the definition of “employee” under the NLRA.  Whether members of a worker cooperative have a protected right to form or join unions is an interesting question, addressed in great depth by attorney Neil A. Helfman in his 1992 article “The Application of Labor Laws to Workers’ Cooperatives.”25

Complying With Additional Government Requirements

  • Notices and records: Employers are also required to post notices related to employees rights, and to keep employee records according to the government’s requirements. You can view, download and print all the required employer postings here:  http://www.dir.ca.gov/wpnodb.html
  • Register with the CA Employment Development Dept using this form: edd.ca.gov/pdf_pub_ctr/de1.pdf, or using this form for non-profit employers: http://www.edd.ca.gov/pdf_pub_ctr/de1np.pdf

Verifying Employee Eligibility to Work in the U.S.

Immigration laws require employers to complete the Form I-9, the Employment Eligibility Verification form to be sure that the employee can legally work in the United States. For more detailed information, and to see the forms, go to the U.S. Citizenship and Immigration Services (USCIS) website.www.uscis.gov.  On the right side of the page there is a section titled “Employment Verification,” you can click on the link below “Employment Verification” that says “I-9 Central” to get specific information on completing and filing the I-9 Form.  Note that if the cooperative members are not considered employees, as described in above sections, then it is not necessary for the cooperative to complete an I-9 for them.

Cooperatives with Members Who are Foreign Nationals

See our page dedicated to this topic.

 

  1.  Tony & Susan Alamo Foundation v. Sec’y of Labor, 471 U.S. 290, 302 (1985).  See also California Division of Labor Standards Enforcement Opinion Letter dated October 27, 1988, available at http://www.dir.ca.gov/dlse/opinions/1988-10-27.pdf, which states: “When religious, charitable, or nonprofit organizations operate commercial enterprises which serve the general public, such as restaurants or thrift stores, or when they contract to provide personal services to businesses, such enterprises are subject to the Industrial Welfare Commission Orders and volunteers may not be utilized.”
  2.  See Department of Labor Opinion Letter, “Volunteer emergency crew as separate and independent agency under section 3(e)(4)(A),” FLSA 2008-13, December 18, 2008, and FLSA, which notes that volunteers may receive “nominal fees” and “reasonable benefits” (29 U.S.C. § 203(e)(4)(A))
  3.  If you want to know more about what kinds of benefits you can provide volunteers, see Hoste v. Shanty Creek Management, Inc.,  592 N.E.2d 360 (Mich. 1999), and Department of Labor Opinion Letter, “Nonexempt employees who volunteer as coaches/advisors and nominal fees under section 3(e)(4)(A),” FLSA 2005-51 (November 10, 2005)
  4.  From Department of Labor Non-Administrator Letter, “Internship program and employment relationship under FLSA” FLSA2004-5NA, dated May 17, 2004. See also the April 7, 2010 Opinion Letter from the California Department of Labor Standards Enforcement, available at: http://www.dir.ca.gov/dlse/opinions/2010-04-07.pdf
  5.  See Williams v. Strickland, 87 F. 3d 1064 (9th Cir. 1996), where the Ninth Circuit looked at a case involving a man that volunteered for a long time for a Salvation Army store, primarily for the purpose of his rehabilitation.  Even though he participated in and benefited a business activity, and even though he may have done work typically done by employees, the court still decided that he wasn’t an employee, arguing that he was a beneficiary of the opportunities Salvation Army offered him for his rehabilitation.
  6.  Community for Creative Non-Violence v. Reid, 490 U.S. 730, 751-752 (1989).
  7.  Goldberg v. Whitaker House Cooperative, Inc., 366 U.S. 28 (1961).
  8.  Clackamas Gastroenterology Associates, PC v. Wells, 538 U.S. 440 (2003).
  9.  Simpson v. Ernst & Young 100 F.3d 436, 443-444 (6th Cir. 1996).
  10.  For an examination of this issue, see McGinley, Ann C.  “Functionality or Formalism – Partners and Shareholders as Employees under the Anti-Discrimination Laws” 57 S.M.U. L. Rev. 3 (2004).
  11.  Note that, for employment law purposes, LLCs and partnerships are generally treated the same.
  12.  http://sfp.ucdavis.edu/cooperatives/reports/LaborLawWorkerCoops.pdf
  13.  As a source of this info, Mr. Helfman cites: Interview at California Employment Development Department (E.D.D.), November4, 1991, with David Johnson (Senior Tax Counsel), Terry Savage (Section Chief Auditor and attorney), and Noreen Vincent (tax auditor).
  14.  See Clackamas Gastroenterology Associates, PC v. Wells, 538 U.S. 440, 443 (2003), where the Court rejected the Ninth Circuit’s reliance on a Second Circuit decision that held that “the use of any corporation, including a professional corporation, ‘precludes any examination designed to determine whether the entity is in fact a partnership.’ 271 F. 3d 903, 905 (2001) (quoting Hyland v. New Haven Radiology Associates, P. C., 794 F. 2d 793, 798 (CA2 1986)). It saw ‘no reason to permit a professional corporation to secure the `”best of both possible worlds”’ by allowing it both to assert its corporate status in order to reap the tax and civil liability advantages and to argue that it is like a partnership in order to avoid liability for unlawful employment discrimination.’” 271 F. 3d, at 905.
  15.  See EEOC v. Dowd & Dowd, Ltd., 736 F.2d 1177 (7th Cir. 1984).
  16.  Godoy v. Rest. Opportunity Ctr. of New York, Inc., 615 F. Supp. 2d 186, 195 (S.D.N.Y. 2009.
  17.  Wheeler v. Hurdman, 825 F. 2d 257, 276, (10th Cir. 1987).
  18.  Fountain v. Metcalf, Zima & Co., PA, 925 F. 2d 1398, 1401 (11th Cir. 1991).
  19.  Caruso v. Peat, Marwick, Mitchell & Co., 664 F. Supp. 144, 149-150 (S.D.N.Y 1987).
  20.  Clackamas Gastroenterology Associates, PC v. Wells, 538 US 440, 448  (2003), quoting the EEOC’s Amicus brief in the case.
  21.  Wirtz v. Construction Survey Cooperative, 235 F.Supp. 621 (D. Conn. 1964).
  22.  See Wirtz at  624, where the court described:  “The members of the Cooperative constitute a small, closely-knit partnership of intelligent technicians, working together as a unit to improve their economic lot as a unit. It was not organized to avoid the application of the Act but existed in the same form long before the Act. The members are not regimented and conduct themselves as self-employed, independent craftsmen. They come and go as they please and work or not work at will. No corporate structure is involved and the Cooperative has no officers, officials or board of directors. All the members share the losses as well as the profits on a monthly basis. No member receives a salary; the terms of remuneration are determined by vote of the entire membership. No one may be expelled. Each member has an equal voice in management and unanimous consent is necessary on all decisions.”
  23.  Wirtz at 624-625.
  24.  See “Taxation of Patronage Dividends from Worker Cooperatives: Are They Subject to Employment Tax?” By Attorney Gregory R. Wilson, available at http://www.gwilson.com/documents/Article4(PatronageDivTax).pdf.
  25.  Available at http://sfp.ucdavis.edu/cooperatives/reports/LaborLawWorkerCoops.pdf.
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