The Roosevelt Institute recently published my brief, which defines domestic outsourcing broadly, as any arrangement that lets a business classify workers as independent contractors, or place a franchisee, subcontractor, or staffing agency between itself and the workers as their sole employer. It explains the common goals and harms of domestic outsourcing and proposes an agenda across federal, state, and local law to remove the incentives for outsourcing and to help workers build countervailing power in fissured workplaces.

The harms of domestic outsourcing are well documented. Outsourced workers earn less than comparable workers who are directly employed and work for businesses that violate basic workplace laws far more frequently than company-owned establishments. Workers classified as independent contractors lose minimum wage and overtime guarantees, antidiscrimination protections, collective bargaining rights, and unemployment insurance and workers’ compensation. While employees of staffing agencies, subcontractors, and franchisees have these rights on paper, those rights are often unusable. If fissured workers unionize and bargain only with the nominal employer, they bargain with a firm whose margins are set by a lead firm that can end the contract if they do.

In this post I want to make two points that motivate the brief’s recommendations. First, work law needs to address the harmful effects of these business models together, rather than one at a time. Second, many needed reforms are at the state and local level, and existing federal statutes already give the federal government ways to encourage them.

On the first point, work law tends create different employment tests depending on the business model (the ABC test to deter the misclassification of employees as independent contractors, and the Board’s reasoning in Browning-Ferris to extend joint employer obligations to some franchisors, for example). Scholars, myself included, often write about one business model at a time. But this division is not how businesses operate. A business might choose multiple forms of outsourcing at the same time, or to swap one for another in order to lower labor costs while keeping control over the work. Large retailers might, for example, directly employ some workers, while using subcontractors or staffing agencies to staff their warehousing operations, and coordinate their delivery networks through independent contractor drivers or small subcontractors or franchisees. The choice often turns on which carries the least cost.

That substitutability means that regulating one model in isolation pushes businesses toward the others. Take the ABC test, which presumes that a worker is an employee and not an independent contractor unless the business shows that the worker is free from its control, performs work outside its usual course of business, and is independently established in that trade. But most courts find that the ABC test asks only whether a worker is an employee, not whether the worker has more than one employer. A business that employs workers misclassified as independent contractors can instead move the same workers onto the payroll of a nominal employer, a strategy that FedEx pursued after losing its independent contractor misclassification litigation, and which Uber threatened to do in California until it rolled back that state’s ABC test in Proposition 22 in 2020. And courts often reject joint employment claims against lead firms that indirectly control workplaces through nominal employers, a problem I take up here and here, and Kati Griffith and I take up here.

That is why the brief proposes pairing the ABC test with presumptions of joint employment across workplace statutes, making lead firms in low-compliance industries jointly and severally liable for violations by their subcontractors and franchisees, and requiring user-clients of staffing agencies to offer the same pay and benefits to temp workers that they provide to their own employees. Each recommendation closes a different exit. None works well alone.

Second, while state and local innovations have attracted significant attention, less well understood is that federal statutes currently give federal agencies many ways to encourage them. For example:

• As Ben Sachs has shown, Section 14(c) of the National Labor Relations Act gives the Board discretion to cede jurisdiction to states, which could unpreempt state labor law in sectors that states adequately regulate. The brief proposes that the Board use that authority to cede its jurisdiction to states that effectively regulate labor relations, particularly in low-compliance sectors that states are better situated to regulate.
• Section 3304(a) of the Federal Unemployment Tax Act (FUTA) conditions federal approval of state unemployment compensation laws—and employers’ access to the FUTA tax credit—on state “conformity” with specified federal requirements for paying unemployment compensation. The brief proposes that the Secretary of Labor use Section 3304(a) to encourage states to adopt the ABC test in their unemployment insurance laws. That would extend coverage to misclassified workers and remove an important tax advantage of domestic outsourcing.
• Section 211(b) of the Fair Labor Standards Act permits the Department of Labor to reimburse state and local agencies for administering state labor laws. The brief proposes that DOL provide Section 211(b) funds to states that effectively regulate fissured workplaces, and condition such funds on the state’s non-interference with effective local enforcement within the state.

Some of the brief’s recommendations, to be sure, would require congressional action. As a leading example, the Trump administration, with the Supreme Court’s blessing in Trump v. Slaughter, rendered the Board inoperable for nearly a year by removing Gwynn Wilcox without cause and depriving the Board of a quorum. To make labor rights usable after the fall of Board independence, workers will need a private right of action to protect their rights to join unions and engage in protected, concerted activities, which the PRO Act proposed, and which former NLRB Chair Lauren McFerran has recently championed (I also argue in favor of a private right of action to enforce NLRA Sections 8(a)(1) and 8(a)(3) here).

Regulating the fissured workplace long term will require comprehensive law reform. But Congress has rarely acted on labor law in half a century, and many of the most promising reforms are happening at the state and local levels. In the near term, federal agencies can use the tools they already have to support the states and localities doing that work now.