Member Labor Issues for Retail Food Co-ops
In reviewing the problems encountered by food co-ops with member labor programs, I find that the situation hasn't changed much since I last wrote on this subject in 1983. A small number of co-ops are being investigated by the federal Department of Labor, the potential for heavy financial liability for serious injuries to volunteers is still high, and the debate about "elitism" and efficiency still rages on.
All of the regulatory problems co-ops have encountered with respect to their member labor programs have come in dealing with employee protection laws. Workers compensation, unemployment, minimum wage, even social security tax all were set up to give workers certain necessary benefits. And all were set up with a legal definition of "employee," so that employers could not circumvent the law by calling someone an "independent contractor."
There is no cut and dried rule of law defining who is an employee and who isn't. It isn't even necessary to have a paycheck to be considered an employee. Room and board, discounts, free meals, etc., can all be considered to be compensation. So it becomes necessary to look at the law to determine whether a person is an employee for the purpose of a particular program.
In English common law, which is the basis for most American law, the definition of employee is based on the right of an employer to control the employee's work. While this is old law, based primarily on cases where there was a dispute about payment or the responsibility of an employer for injuries caused by an employee, it is still a key basis for determining the distinction between employees and independent contractors today. Since in co-ops the volunteer worker is often under the direction of the paid staff, that could be a strong argument for employee status.
Another test, one strongly urged by Arthur Larsen in his useful treatise, The Law of Workmen's Compensation (published by Matthew Bender and updated yearly), is the nature of the work test. This means that the work done is related to the business enterprise and is part of the regular course of business. This test, too, might well cover co-op volunteers.
However, the test used by the Supreme Court in cases involving civil rights and other social legislation might exclude co-op volunteers. It is the economic reality test. The employment relationship is to be determined by looking at all the factors involved, including particularly the dependence of the employee on the employer for work or for the opportunity to work. While this test has been used to find that many persons who are called independent contractors are in fact employees, it could have the opposite effect on member labor in co-ops.
In dealing with the legal issues of member labor, I find it useful to break problems into three distinct areas: workers compensation, minimum wage, and taxation. Of the three, workers compensation is the one where the law is the clearest and the solution is the easiest, so I will address it first.
The purpose of workers compensation is two-fold. First, it was established to make certain that employees who were injured on the job, whether or not they were at fault, were able to get treatment and income while they recovered. Secondly, it was established to put limits on the liability of employers for employee injuries; otherwise, an employee who was not at fault might well be able to sue the employer under personal liability law and win a huge settlement. Employees give up the right to huge settlements for the right to guaranteed ones.
Co-op Nightmare: Zealots Vs. Volunteers
Co-op Food Fair is a consumers cooperative in Independence, Missouri. We are a full-line grocery store, with most of our volume coming from the sale of natural foods. We also operate an auto shop across the parking lot on the same property. The co-op has grown over the years from a few families and $900 in inventory to a membership of about 5000 families and an inventory of $150,000. We hope to celebrate our 15th anniversary in November.
I say "hope" because also in November we have a date with a judge and two very aggressive employees from the U.S. Department of Labor. The "crime" for which we are being sued is the use of volunteer labor.
In October of 1990, we were subjected to a "routine" audit by the Department of Labor (DOL). This investigation found some minor problems we had to address. They were not serious, but in some areas we were ignorant of the law. Those things have been fixed, and we are now in full compliance and have paid our fines. The only remaining complaint is the volunteer issue.
The DOL offered to resolve the issue for $75,000. This money would be paid to the volunteers for the time they volunteered. Our Gold Star volunteer program had allowed members a 5 percent discount for three hours of work per week. The $75,000 was computed by multiplying minimum wage times three hours per week times 52 weeks, times two years (the statute of limitations), times each volunteer. Never mind the fact that one volunteer did snow removal -- there are several weeks out of the year when we don't get much snow in Missouri. Never mind that one volunteer gave legal advice that consisted of one or two brief phone calls. Never mind that one volunteer was a mentally handicaped young woman -- we were working in cooperation with her case worker to see if she could be trained and be able to hold a steady job. These volunteers are all member-owners and do not want to be paid. The DOL says they know that but it's the law, Nor does it matter that we are a not-for-profit organization. The DOL also stated that the board of directors should be paid because of their role as decision-makers.
The case worker went so far as to say that if you are in a store and there is a box of cereal on the floor, it would be against the law (her interpretation of it) to voluntarily bend over and pick it up and place it back on the shelf.
The statement was made that if we wrote a check to "our volunteers," most of them would just sign it back over to the co-op. The compliance officer said ifthe co-op accepts these checks, "we'll get you for coercion."
When we were audited in October of 1990, the auditor had less than a year's experience on the job. The lawyer our case was later assigned to by the Labor Department hadjust passed the bar in September of 1991. I ask, could it be possible that these two new DOL employees are testing their authority, throwing their weight around and trying to make a name for themselves at the expense of a 15-year-old company and fourteen full-time and fourteen part-time employees? If we do go to court, the case may set a precedent on volunteer labor everywhere.
We have tried to contact our Senators and Representatives. Their people tell us they will look into it. Then in two or three weeks we get a letter telling us that the U.S. Department of Labor is investigating us, as if we didn't already know that. This is the first time I've been exposed to what is, in my opinion, a gross injustice.
We do not have the resources to fight this out through the courts or to pay the settlement without jeopardizing the business. We are continuing to go about our daily labors and trying to assure our people there isn't anything to be too concerned about. Our greatest concern probably should not be what happens to Co-op Food Fair or even the co-op movement in general, but what is happening to our country. It would appear that the farther the formerly communist countries move to the right, the farther the U.S. moves toward total government control. We are allowing officials to take our freedoms away. We as Americans have to take some control ourselves instead of yelling for more government control every time some controversy comes up.
It would do you all well to familiarize yourselves with the laws and decide if you think you are in compliance. It may save you a lot of trouble in the future.
-- Co-op Food Fair manager Jim Cady
Like the other employee protection laws such as unemployment insurance and minimum wage, workers compensation must be provided for all employees. Because the law was intended to remedy the inequality of bargaining power between employer and employee, the definition of employee is a matter of law. It is not possible for a person to agree not to be considered an employee.
Although workers compensation was originally created by federal law, it is enforced by the states. Generally, a business must obtain workers compensation insurance to cover its employees. Benefits include medical expenses, weekly payments for partial or total disability, payment for lost wages and death payments to surviving relatives. The payments are limited by statutory requirements. Each state has a different body of case law determining who is covered by workers compensation.
The situation of co-ops with respect to workers compensation is similar to that of other volunteer organizations. Because of this, and because the injuries that happen are often quite serious, there is a significant body of law determining whether or not a volunteer is an employee. Generally, a court will find a person to be an employee if there is some form of compensation, no matter how minor, so long as there is an express or implied contract to hire the person (found in virtually every case where the person is working with the consent of the employer). The rate of pay, or even the purpose of the pay, are often irrelevant.
For example, in Minnesota, an officer of the American Legion was killed while driving home from a convention. He had received expense money to attend the convention, and attending the convention was found to be part of his duty as an officer. His wife received death benefits.
In Illinois, the court found that an unpaid teacher's aide was not entitled to benefits. However, a lunchroom monitor, whose small salary was actually paid by the PTA, was entitled to workers compensation from the school.
In Missouri, a hospital volunteer whose only "pay" was a twenty percent discount in the hospital coffee shop was compensated for a slip and fall accident. In California, a student working as an extern in the hospital for no pay as part of her education was found to be an employee since she was receiving educational benefits.
In Pennsylvania, a church member working on a new church building was killed in a fall from the roof. The court found workers compensation was due, since the member was working in lieu of tithes paid by church members.
A general review of the cases inclines me to believe that in the case of serious injury of a volunteer worker, the courts will often find a remedy under workers compensation. In most cases, it seems to be a fair resolution. Applying workers compensation to volunteers meets a test that other employee benefit laws do not: need. Much of the work done in retail co-ops has potential for injuring people, particularly unskilled ones. Consider lifting boxes, cutting cheese, dealing with frozen products, etc.
Premises liability insurance does not generally cover people who are working in the store. It might be possible to have a special policy, but I think the easiest method is to include volunteers under the workers compensation insurance carried by the co-op on its employees. This has been done in a number of jurisdictions (in the case of the Pennsylvania church mentioned above, there was a workers compensation policy in place), and is probably not particularly expensive unless the co-op has a number of claims.
There does not seem to be the same need to apply the minimum wage laws to volunteer member labor. However, the intervention by the Department of Labor in the policies of some co-ops is probably the most serious problem. The recent experience of La Montanita Co-op Supermarket in Albuquerque is typical. (See "Minimum Wage, Maximum Stress," CG #32, January-February 1991.)
La Montanita had a program where co-op members who worked three hours per week in the store received an 18 percent discount. The Department of Labor gave them an order to increase the discount to the minimum wage or stop the program. Like most co-ops that have been confronted with this problem, they eventually decided to change their program, in part because they didn't have the resources to fight alone, and other co-ops were either unable or unwilling to help them.
Nine years ago a small co-op in Florida had the same problem, and also changed its program. Co-op Food Fair in Missouri has been confronted with a similar situation. It appears that local offices of the Labor Department discover these programs and take action; there has not yet been a nationwide effort.
To understand why the Department of Labor would take this stand, it is necessary to know a little about the minimum wage laws in this country. Minimum wage is part of the federal Fair Labor Standards Act (FLSA), a New Deal reform that also regulated overtime pay and other employee rights. As with workers compensation, it was designed to remedy the inequities in the bargaining power between employees and employers.
The present minimum wage under federal law is $4.25 per hour. Some states have a higher minimum wage, but no state can set a lower one. There are some occupations not covered by the minimum wage, and there are very limited training wages and other exceptions. Professional and executive employees are exempt from coverage, since they usually make in excess of the minimum wage. Minimum wage is generally assumed to apply to all businesses grossing more than $500,000 annually. A co-op which grosses less than that will probably be safe from intervention by the Department of Labor.
I doubt that many co-ops have basic philosophical objections to minimum wage in the case of employees. But most co-ops find it difficult to understand how it can be made to apply to volunteers. The answer, again, is that the definition of"employee" is a legal one, not the one agreed upon by the parties involved. There is a certain amount of legal argument on the side of the Department of Labor.
However, it seems very clear to me, particularly since I have recently reviewed the FLSA, that this small rewarding of volunteers for their services was not the kind of "employment" the law was intended to cover. I find it interesting that the Labor Department representative told La Montanita that using volunteers to do routine grocery store work such as stocking and bagging gave them an "unfair advantage" over commercial supermarkets. I find nothing in the FLSA that is designed to address competition among businesses. And while increasing the number of paid jobs in an area might be a laudable purpose of the Labor Department, I do not see it set out in the minimum wage laws.
There are many legal arguments which could be made in fighting the Department of Labor on this issue. I would note, for example, that most co-ops are incorporated under special co-op laws which usually require smaller fees and less regulation than other corporations and which are often related to non-profit incorporation laws. It is reasonable to argue that they are more like non-profits in their reliance on volunteers.
While Congressional passage of a specific exception in the FLSA would solve the problem, it is a major undertaking which has been unsuccessfully tried in the past. The amount of energy which would be expended on such a small point would be immense; I suspect there are other areas more important to the co-op movement as a whole.
Taxes are probably the vaguest area of all. Except for the Gordon Park case of nine years ago, I have not heard of any case where a co-op has run into trouble with the IRS for not withholding taxes and paying Social Security for volunteers based on their discounts. In the case of Gordon Park, the discount was so deep that it was less than the cost of goods sold, and the tax was placed on the amount of the discount below cost. Again, the IRS, like the Department of Labor, does not seem to have any concerted policy in this area, and co-ops are more likely to run into an overzealous local office than anything else.
Perhaps the main reason IRS hasn't become more involved is that the amount of income per person is so small that there is little, if any, tax owed on it. Social Security could be more of a problem, since it must be paid by both employer and employee on every dollar earned. Few co-op volunteers would have any federal tax withheld, but all would have Social Security tax taken from their discount.
Requiring minimum wage will shut down a co-op's labor program; requiring tax withholding will not be a big financial problem, though it will create excessive paperwork. The advice of Leo Cashman, who wrote a study for Outpost Natural Foods Co-op nine years ago, is probably still good. If the discount given is nominal and is not related to actual work done, it is less likely to be seen as income, particularly if the co-op has other discount programs such as ones for the handicapped, elderly, low income, etc.
Unemployment taxes (or, in some states, a requirement to have unemployment insurance) are least likely to be relevant; given the small number of hours worked, most volunteers are unlikely to qualify for unemployment based on their co-op work. If it were required, I suspect the financial cost would not be substantial. Again, the paperwork might be a major nuisance.
The solutions in each area of employee benefits are different. In the case of workers compensation, a co-op which gives discounts for any kind of member labor is well advised to insure that volunteers are included on its workers compensation program. In fact, any co-op which requires work as part of membership, or in lieu of paying some membershIp fees, should probably do so. Given that workers compensation rates are based on claim history, and given the small amount of money involved, I think co-ops will find this course of action financially reasonable. Since most workers compensation issues arise when someone is injured, the co-op which includes volunteers in its insurance will be prepared in advance for problems.
In the case of federal payroll taxes, there appears to be little to go on. The best advice appears to be to structure the discount program for labor so that it is similar to other, non-work-related discounts, and to keep it nominal. I would also advise co-ops to be meticulous in paying their payroll taxes for their employees, and to pay their federal and state taxes in a timely manner. If the IRS does investigate a co-op's member labor program, a good history on payroll taxes will go a long way toward arguing good faith on the part of the co-op. In the only case I am familiar with, the co-op was able to work out a settlement with the IRS.
It is the Department of Labor's minimum wage claim that has caused the most difficulty for co-ops. While these problems have been sporadic, they have put serious pressure on the co-ops involved. So far most co-ops have been able to modily their volunteer programs to satisfy the Labor Department, and have avoided major penalties and liabilities. Again, this process is probably based on the officer's decision that the co-op had acted in good faith, since the Labor Department can require back pay and other penalties, and does so in some cases.
With minimum wage, co-ops have three choices. They can continue their volunteer labor with discount system, and hope that the Labor Department doesn't find out or deals reasonably with them ifthey do. They can decide to fight the Labor Department, which has some legal basis but would be expensive or time consuming. Or they can modify their labor program now to meet most of the objections that could be raised.
Perhaps it is a good time in the co-op movement to take a serious look at member labor from a number of perspectives. Co-ops looking to revise or set up a program should consider the legal issues noted above along with the value of participation, the efficiency of volunteers in certain jobs and the purpose of the co-op.
La Montanita, for example, stopped using volunteer labor for stocking, loading and other jobs directly related to the grocery business. It still gives discounts for service on the board and committees and for other professional skills used by the co-op, since those services can be seen as exempt under the FLSA. (Professionals and executives are not covered by minimum wage, overtime and other benefits of the FLSA.)
Another solution is to require a certain minimum participation from all members as a condition ofmembership. This is generally unworkable in large co-ops, unless the requirement is quite small and includes membershp meeting attendance. It probably works best in buying clubs and small storeg, which should fall below the FLSA minimum gross income standards.
It might also be time to consider asking for volunteers without giving any financial reward. That is the solution in housing co-ops. Member participation is vital to housing co-ops, not only in the initial organizing stages, but also in the ongoing operation of the co-op, which has the responsibility of running an apartment building.
There are no discounts in housing co-ops for member participation. All residents pay the same fees, whether they help out or not. As might be expected, methods of increasing member participation are a hot topic in housing co-ops. In my experience, a twenty-five percent participation rate is typical, and sometimes that twenty-five percent gets tired. But even so, without discounts or other privileges, the necessary work of the cooperative is accomplished.
Except in small housing co-ops, the participation is generally through service on the board and committees. Most co-ops hire management companies to handle the daily affairs of the business, and the larger ones use janitorial services and resident managers to cope with the building on a regular basis. Some have gardening committees to take care of the grounds, and small ones will do their own janitorial work.
I would note that the typical residents ofthe housing co-ops I am familiar with are low to moderate income persons, and most are African-American. Most of the people who run the boards of directors have full-time jobs and other responsibilities, yet they find time to give to their co-ops because they think it is important.
It is time for the food co-ops to consider whether the discounts are an integral part of their member labor program and also to consider whether volunteers are the best solution for performing the daily operating tasks of grocery stores. A membership program which encouraged, but neither required nor gave discounts for, service on the board and committees, publication of the newsletter, nutrition and cooperative education and the many other activities that are best handled by volunteers, might work very well. It would certainly meet most of the legal objections.
Member participation is an inherent part of co-ops, and should not be eliminated. The weakest co-ops are those whose members see them only as a store (or "landlord"). However, I don't think we need to bribe co-op members into participating; those who have the time and want to give will do so regardless of reward.
A word of caution: ending discounts, or restricting the work for which discounts are given may solve the problem of the minimum wage or taxation claims. But workers compensation could still arise. In the case of a bad accident, it is quite possible that a court would find that a member doing voluntary work for the co-op was an "employee" because he or she received the benefit of the lower prices of membership. Inclusion of volunteers on a workers compensation policy is a prudent course that all co-ops should consider.