The Department Of Labor Issues Final Rule Regarding Joint Employer Status Under The FLSA

Category: Special Bulletins
Date: Jul 8, 2020 03:09 PM

The United Stated Department of Labor has issued a final rule updating its regulations regarding joint employer status under the FLSA.  This bulletin will discuss the final rule and how it could affect whether an employee who works for you could be considered an employee who works for joint employers.  This bulletin will also provide you with specific examples of employees who are considered employees of joint employers and those who are not.

The Fair Labor Standards Act (FLSA) requires covered employers to pay their employees at least the federal minimum wage for every hour worked and overtime for every hour worked over 40 in a workweek. To be required to pay minimum wage or overtime to an employee, a person or entity must be an “employer.” The FLSA defines “employer” in section 3(d) to “include any person acting directly or indirectly in the interest of an employer in relation to an employee,” “includes a public agency,” but “does not include any labor organization (other than when acting as an employer) or anyone acting in the capacity of officer or agent of such labor organization.”

As the U.S. Department of Labor (DOL) has recognized since the FLSA’s enactment, an employee can have two or more employers who are jointly and severally liable for the wages due the employee (i.e., joint employers). In 1958, the Department published an interpretive regulation, codified in 29 CFR part 791, which explained that joint employer status depends on whether multiple persons are “not completely disassociated” or “acting entirely independently of each other” with respect to the employee's employment.

DOL’s new rule updates and clarifies the circumstances in which an employee, under the FLSA, may have joint employers who can be held jointly and severally liable for wage and hour obligations, such as minimum wage and overtime payments.  Specifically, the rule provides guidance concerning two potential joint employer scenarios. First, the final rule adopts a four-factor balancing test for determining joint employer status in the scenario where one employer employs an individual and a second employer benefits from the employee’s work. Second, the rule provides guidance regarding joint employer status where an employee works separate hours in the same workweek for multiple employers.

Four-Factor Balancing Test

In the first scenario, where an employee has an employer who suffers, permits (i.e., requires or allows) or otherwise employs an employee to work and another person simultaneously benefits from that work, the other person is the employee’s joint employer under the Act only if that person is acting directly or indirectly in the interest of the employer in relation to the employee. The new rule adopts a four-factor balancing test to determine whether the potential joint employer is directly or indirectly controlling the employee, assessing whether the potential joint employer:

  1. Hires or fires the employee;
  2. Supervises and controls the employee's work schedule or conditions of employment;
  3. Determines the employee's rate and method of payment; and
  4. Maintains the employee's employment records.

No single factor is determinative, and the DOL suggests that courts give appropriate weight to the factors depending on the circumstances. While the application of the four factors should determine joint employer status in most cases, the Department recognizes, consistent with longstanding precedent, that additional factors may be relevant for determining joint employer status. Accordingly, the final rule provides that additional factors may be considered, but only if they are indicia of whether the potential joint employer exercises significant control over the terms and conditions of the employee's work.

To illustrate, City hires a janitorial services company to clean City offices after-hours. According to a contractual agreement between the City and the janitorial company, the City agrees to pay the janitorial company a fixed fee for these services and reserves the right to supervise the janitorial employees in their performance of those cleaning services. However, City personnel do not set the janitorial employees’ pay rates or individual schedules and do not supervise the workers' performance of their work in any way.

Here, the City is not likely a joint employer of the janitorial employees because it does not hire or fire the employees, determine their rate or method of payment, or exercise control over their conditions of employment. The City’s reserved contractual right to control the employee's conditions of employment is not enough to establish that it is a joint employer.

Now assume the City’s contract with the janitorial company does not give the City authority to hire or fire the company's employees or to supervise their work on the City’s premises. However, in practice a City employee oversees the work of employees of the company by assigning them specific tasks throughout each day, providing them with hands-on instructions, and keeping records tracking the work hours of each employee. On several occasions, the City requested that the company hire or terminate individual workers, and the company agreed without question each time.

Under these facts, the City is likely a joint employer of the company’s employees because the City exercises sufficient control, both direct and indirect, over the terms and conditions of their employment. The City directly supervises the company’s employees’ work on a regular basis and keeps employment records. The company’s repeated and unquestioned acquiescence to the City’s hiring and firing requests indicates that the City exercised indirect control over the company's hiring and firing decisions.

Actual Exercise of Control is Required

The final rule clarifies that to be a joint employer under the FLSA, a second employer must actually exercise—directly or indirectly—one or more of the four control factors identified above. Thus, the other person's ability, power, or reserved right to act in relation to the employee may be relevant for determining joint employer status, but such ability, power, or right alone does not demonstrate joint employer status without some actual exercise of control. Indeed, the focus is on actual control rather than control that may only exist in contractual terms.  Under the current rule, certain contractual agreements do not make joint employer status more or less likely, such as:

  1. Requiring background checks
  2. Requiring inclusion of standards, policies and procedures in an employee handbook
  3. Instituting sexual harassment policies
  4. Mandating that employers comply with their obligations under FLSA or other similar laws
  5. Establishing workplace safety practices or protocols
  6. Requiring that workers receive training regarding matters such as health, safety or legal compliance
  7. Requiring the inclusion of such standards, policies, or procedures in an employee handbook

Contractual agreements requiring quality control standards to ensure the consistent quality of the work product, brand or business reputation also do not make FLSA joint employer status more or less likely. Parties may monitor and enforce such agreements without making it more or less likely that a joint employer relationship exists under the FLSA.

Economic Dependence is Not Relevant Under FLSA Joint Employment Test

The final rule makes it clear that the federal test for independent contractor (“IC”) status is different from the test for joint employer status.  In particular, the final rule clarifies that economic dependence, while relevant to a determination as to whether a worker is an employee or IC, has no relevance as to whether two or more employers are the worker’s joint employer. Keep in mind that “economic realities” may still be a factor in analyzing joint employment status under the California common law test. 

The final rule identified four factors that may be pertinent to IC status but should not be used in determining joint employer status.  Thus, factors that assess the employee's economic dependence are not relevant to determine whether the worker has a joint employer and include, but are not limited to:

  1. Whether the employee is in a specialty job or a job that otherwise requires special skill, initiative, judgment, or foresight;
  2. Whether the employee has the opportunity for profit or loss based on his or her managerial skill;
  3. Whether the employee invests in equipment or materials required for work or the employment of helpers; and
  4. The number of contractual relationships, other than with the employer, that the potential joint employer has entered into to receive similar services.

For example, City contracts with company to provide a day laborer to work drywall on a construction project at the City.  Here, the typical day laborer by virtue of his employee status, is not exercising special skill, initiative, judgment, or foresight, does not have the opportunity for profit or loss based on managerial skill, and is not investing in equipment or materials required for work or employing helpers (notwithstanding any technical skills that he may have). Accordingly, while these factors may be relevant to a determination as to whether the day laborer is an employee or IC, they have no relevance as to whether the City and company are the worker’s joint employer.

Test for Determining Joint-Employer Status When Employee Works Separate Jobs and Hours for Multiple Employers

The final rule addressing a second scenario notes that a joint employer relationship may also exist where an employee performs distinctly different jobs for multiple employers and “the employers are sufficiently associated with respect to the employment of the employee.” Employer’s will generally be “sufficiently associated” if there is an arrangement between them to share the employee’s services; one employer is acting directly or indirectly in the interest of the other employer in relation to the employee; or the employers share control of the employee, directly or indirectly, by reason of the fact that one employer controls or is controlled by, or is under common control with the other employer.

Joint employer liability under these circumstances will depend “on all of the facts and circumstances” but “certain business relationships . . . which have little to do with the employment of specific workers—such as sharing a vendor— are alone insufficient to establish that two employers are sufficiently associated to be joint employers.” The new rule is likely to have its greatest impact in the staffing and franchise industries, but all employers should take note. 

For example, an individual assigned by a staffing agency to work 30 hours per week as a customer services representative at one water district and assigned to work 20 hours per week as a customer services representative at a different water district affiliated with the same staffing agency. The water districts are independently managed and do not coordinate in any way with respect to the customer service representative’s schedules and pay.

Under these facts, the water districts are likely not joint employers of the customer service representative because they are not associated in any meaningful way with respect to the customer service representative’s employment. The similarity of the customer service representative’s work at each district, and the fact that both districts use the same staffing agency, are not relevant to the joint employer analysis, because those facts have no bearing on the question whether the districts are acting directly or indirectly in each other's interest in relation to the customer service representative.

Impacts on California Employers

Employers subject to the FLSA will likely welcome the DOL’s final rule because it narrows the scope of joint employment, thus, easing some of the risk of joint employer liability. Indeed, from the employer perspective, the four-factor test is welcomed as it focuses on actual control rather than control that may only exist in contractual terms.

However, it is important for employers to note that the final rule applies only to joint employer status under the FLSA.  The Equal Employment Opportunity Commission is expected to issue its own regulations and standards on joint employment in the coming months and on April 27, 2020, the National Labor Relations Board’s (“NLRB”) final rule governing determination of joint-employer status became effective.[1]

California employers should remember that the state has its own set of joint-employer rules that are generally broader and more protective of workers than the federal law. The Industrial Welfare Commission and the California Supreme Court adopted a broad joint-employer definition that focuses on the employer’s exercise of control over wages, hours and working conditions.  The generally accepted test for joint employer liability considers whether two or more employers exert direct and immediate control over the same employees such that both employers can be said to share or co-determine the essential terms and conditions of employment. Whether a joint employer relationship exists is a fact-specific determination and can depend on many factors including, but not limited to, whether the putative employer (i.e., the employer being deemed to be a joint employer although not necessarily the direct employer) has control over the employee’s wages, hours, or terms and conditions of employment.   

Based on the changes to the law and the difficulty presented in analyzing joint employer situations under federal law, agencies should consult with legal counsel for ways to minimize the risk of joint-employer liability.  Liebert Cassidy Whitmore attorneys are here to help you analyze these situations to help you comply with the law. 

[1] The NLRB’s joint employer standard is different from the new DOL standard. Although the NLRB rule is new, its standard represents a return to the NLRB’s past interpretation. The final rule generally restores the “direct and immediate control” standard that the NLRB applied for decades prior to the 2015 Browning-Ferris decision, but provides additional guidance regarding the circumstances pursuant to which one employer may be considered a joint employer of employees of another company.

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