How Do You Distinguish Employees Versus Workforce?

Consider this: Is an inmate working at a prison, and paid by the prison for the job, the company's employee?

Last Spring Whole Foods was forced to consider this question when it was revealed some of the grocer's fish and cheese was procured from companies contracting with private prisons, the food prepared by inmate laborers. As a result of consumer protest, Whole Foods has pledged to eliminate selling products made by inmates by April 2016.

This question came up for us too as members of our team examined the SEC filings of a publicly traded prison company that was part of our investment portfolio. Employment law is murky on the status of incarcerated workers.

When prisons were primarily government-run, courts were clear that inmates doing work did not have worker protection rights. But as more and more private companies have become a part of the prison system, questions are being raised about whether the same applies or should apply at for-profit companies.

According to current case law, courts do not generally view inmates as having worker protections because the relationship between inmates and prisons is considered "noneconomic in nature." In a 2008 Vanderbilt Law review paper, UCLA law professor Noah Katz offers this analysis:

Employment is specifically an economic relationship. Controversy over this economic character erupts when individuals work in institutional settings, such as prison labor, that readily split apart two senses of the economic that widely are presumed to coincide: the economic as market interaction [because prisoners do not compete with other workers for their jobs] and the economic as production, distribution, and consumption of goods and services.

But in the American Prospect, criminal justice issues writer Beth Schwartzapfel argues that not only is inmate labor economic in nature but it is economically harmful over time, as it provides uncompetitive labor to some contractors and reduces the prevailing wages in the communities where they operate. She writes,

Paying inmates a prevailing wage would eliminate the complaint by free-world competitors and labor unions that prison shops are undercutting wages, since the wages would be the same on the inside and on the outside. It would help inmates make amends for their crimes, too, by allowing them to pay restitution to victims. And it would help them to accumulate some savings so they can rebuild their lives when they're released.

Schwartzapfel notes that courts have consistently held that prisoners cannot be classified as employees, despite the fact that their employment otherwise meets the three-pronged employer test established in 1935: the individual is under company's control and direction, the individual is not engaged in other independent business of the same nature and that the work is not outside of the usual course of business of the employer.

And inmates are not alone in this murky place in employment law. In his paper on inmate labor, Katz further argues that many businesses "have substantial and systematic incentives to structure a workforce in ways that avoid the strictures of employment law." At least 50 million U.S. workers have been labeled freelancers or "independent" contractors, with numbers expected to grow to 60 million by 2020. Witness the extra staff working holiday deliveries at UPS or just about any Uber driver.

A growing number of recent lawsuits argue that many of these workers also meet the three-pronged test. These workers sometimes comprise large portions of a company's daily business and revenue streams, and go without labor protections ranging from unemployment insurance and worker's compensation to having to bear the entire cost burden of Social Security and health care.

While many are attempting to clarify employment law, as investors and consumers we are not bound by these legal loopholes. We remain free to ask questions and to judge a company based on the makeup of its workforce, whether it is inmate labor, undocumented workers, independent contractors or even adjunct professors living on a pittance. For those of us who care about people having a real chance to get ahead, we can assess whether companies are off-loading their economic risks onto the people who can least afford to bear them, or whether they are offering real economic opportunities to people both in and out of prison.

If the being an "employee" is becoming less and less viable, we must ask instead, "What does your entire workforce look like, and how are they compensated and treated and what protections do they have?"