United States: DOL Issues Guidance On Joint Employment Under FLSA

Last Updated: January 21 2016
Article by Tammy McCutchen and Michael J. Lotito

The Department of Labor's Wage & Hour Division (WHD) has issued an Administrator's Interpretation (AI)1 establishing new standards for determining joint employment under the federal Fair Labor Standards Act (FLSA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA). While it remains to be seen how much deference will be accorded such sub-regulatory guidance,2 the WHD will likely use the AI as justification for charging a greater number of employers with violations of these statutes on the grounds they are joint employers with the offending entity.

Whether an employer is deemed a joint employer has significant repercussions for liability purposes, particularly with respect to wage and hour law. As noted in the AI:

When two or more employers jointly employ an employee, the employee's hours worked for all of the joint employers during the workweek are aggregated and considered as one employment, including for purposes of calculating whether overtime pay is due.

Although the AI admits, "[c]ertainly, not every subcontractor, farm labor contractor, or other labor provider relationship will result in joint employment," the WHD is surprisingly candid in revealing the purpose of the AI—to expand statutory coverage of the FLSA to small businesses and collect back wages from larger businesses:

Where joint employment exists, one employer may also be larger and more established, with a greater ability to implement policy or systemic changes to ensure compliance. Thus, WHD may consider joint employment to achieve statutory coverage, financial recovery, and future compliance, and to hold all responsible parties accountable for their legal obligations.

To further these goals, the WHD states in the AI: "The concept of joint employment, like employment generally, should be defined expansively under the FLSA and MSPA." 

The AI specifically targets the construction, agricultural, janitorial, warehouse and logistics, staffing and hospitality industries.  The AI also includes examples from the health care, restaurant and security industries.  Although all employers should review their business-to-business relationships in light of the WHD's new standards, employers in these industries should be especially concerned.

For the first time in the AI, the WHD differentiates between "horizontal" joint employment and "vertical" joint employment, and provides guidance on assessing each category.  Horizontal joint employment involves relationships between or among two or more employers that "are sufficiently associated or related with respect to the employee such that they jointly employ the employee." According to the AI, "guidance provided in the FLSA joint employment regulation – which focuses on the relationship between potential joint employers – is useful when analyzing potential horizontal joint employment cases."  To determine whether horizontal joint employment exists, the WHD will apply its current joint employment regulations and examine the following non-inclusive factors: 

  • who owns the potential joint employers (i.e., does one employer own part or all of the other or do they have any common owners);
  • do the potential joint employers have any overlapping officers, directors, executives, or managers;
  • do the potential joint employers share control over operations (e.g., hiring, firing, payroll, advertising, overhead costs);
  • are the potential joint employers' operations inter-mingled (for example, is there one administrative operation for both employers, or does the same person schedule and pay the employees regardless of which employer they work for);
  • does one potential joint employer supervise the work of the other;
  • do the potential joint employers share supervisory authority for the employee;
  • do the potential joint employers treat the employees as a pool of employees available to both of them;
  • do the potential joint employers share clients or customers; and
  • are there any agreements between the potential joint employers.

Vertical joint employment focuses on the employee's relationship with the employer and another intermediary entity. With respect to vertical joint employment, the AI announces that it will abandon the current FLSA joint employment regulations.  Instead, the WHD will apply the "economic realities" test in evaluating the relationship between or among the entities at issue. While the factors used in this test vary among jurisdictions, the AI emphasizes that "any formulation must address the 'ultimate inquiry' of economic dependence."  The application of such a test, however, is far from a bright-line standard.  When applying the economic realities test to determine vertical joint employment, the WHD will draw from the seven economic reality factors describe in the MSPA regulations (which do not, as a legal matter, apply to the FLSA):

  1.  Directing, Controlling, or Supervising the Work Performed. To the extent that the work performed by the employee is controlled or supervised by the potential joint employer beyond a reasonable degree of contract performance oversight, such control suggests that the employee is economically dependent on the potential joint employer. The potential joint employer's control can be indirect (for example, exercised through the intermediary employer) and still be sufficient to indicate economic dependence by the employee. Additionally, the potential joint employer need not exercise more control than, or the same control as, the intermediary employer to exercise sufficient control to indicate economic dependence by the employee.
  2. Controlling Employment Conditions. To the extent that the potential joint employer has the power to hire or fire the employee, modify employment conditions, or determine the rate or method of pay, such control indicates that the employee is economically dependent on the potential joint employer. Again, the potential joint employer may exercise such control indirectly and need not exclusively exercise such control for there to be an indication of joint employment.
  3. Permanency and Duration of Relationship. An indefinite, permanent, full-time, or long-term relationship by the employee with the potential joint employer suggests economic dependence.
  4. Repetitive and Rote Nature of Work. To the extent that the employee's work for the potential joint employer is repetitive and rote, is relatively unskilled, and/or requires little or no training, those facts indicate that the employee is economically dependent on the potential joint employer.
  5. Integral to Business. If the employee's work is an integral part of the potential joint employer's business, that fact indicates that the employee is economically dependent on the potential joint employer.
  6. Work Performed on Premises. The employee's performance of the work on premises owned or controlled by the potential joint employer indicates that the employee is economically dependent on the potential joint employer. The potential joint employer's leasing as opposed to owning the premises where the work is performed is immaterial because the potential joint employer, as the lessee, controls the premises.
  7. Performing Administrative Functions Commonly Performed by Employers. To the extent that the potential joint employer performs administrative functions for the employee, such as handling payroll, providing workers' compensation insurance, providing necessary facilities and safety equipment, housing, or transportation, or providing tools and materials required for the work, those facts indicate economic dependence by the employee on the potential joint employer.

The agency's reliance on the economic realities test is not grounded in statutory or regulatory language and it is noticeably absent from the DOL's own regulations on joint employment.3 Specifically, under the DOL regulations, which were last amended in 1961, joint employment exists in three circumstances:

  • Where there is an arrangement between the employers to share the employee's services, as, for example, to interchange employees; or
  • Where one employer is acting directly or indirectly in the interest of the other employer (or employers) in relation to the employee; or
  • Where the employers are not completely disassociated with respect to the employment of a particular employee and may be deemed to share control of the employee, directly or indirectly, by reason of the fact that one employer controls, is controlled by, or is under common control with the other employer.4 

Both the distinction between vertical and horizontal joint employment, and the WHD's application of the economic realities test, represent a departure from current agency standards.  The WHD, however, did not pursue the notice-and-comment procedures required under the Administrative Procedures Act to change agency regulations, leaving the AI open to almost certain challenge.

This AI reflects the agency's longstanding priority to loosen joint employment standards.  David Weil, Administrator of the WHD, has been a vocal critic of the so-called "fissuring" of the workplace, which he claims has added to increased wage and hour violations and made enforcement difficult. Weil has claimed that the "impact of supply-chain relationships, branding, franchising, third-party management, and subcontracting all have important implications for patterns of compliance in an industry and for strategies that WHD can take to affect employer behavior."5 It seems clear by this AI that the WHD will closely scrutinize these types of employment relationships to see whether joint employment exists.

Although the AI makes it a point to say the test for joint employment under the FLSA differs from the test under other labor statutes, it is unclear whether a finding of joint employment under wage and hour laws will carry over in other situations. The National Labor Relations Board, most notably, has recently taken an expansive view of joint employment in its Browning-Ferris decision, and through its General Counsel's filing of multiple lawsuits against a franchisor for alleged unfair labor practices committed by its franchisees.  Also, the Occupational Safety and Health Administration has come under fire for a leaked internal memorandum encouraging OSHA inspectors to evaluate whether a franchisor could be considered a joint employer for purposes of health and safety citations filed against the inspected franchisee. On January 19, 2016—the day before the WHD issued its AI—the House Committee on Education and the Workforce sent a letter to Labor Secretary Thomas Perez renewing its request for information on OSHA's proposal.

The issue of joint employment will continue to be a contentious one in 2016. The AI provides some insight into the arguments the WHD may use when pursuing joint employer liability.

Footnotes

1. Department of Labor, Wage and Hour Division, Administrator's Interpretation No. 2016-01 (Jan. 20, 2016), available at http://www.dol.gov/whd/flsa/Joint_Employment_AI.pdf.

2. The AI, for example, declares the joint employment standards adopted by the First and Third Circuit Courts of Appeal to be "not consistent with the breadth of employment under the FLSA."  It seems unlikely that these circuits will abandon their own cases law in deference to the new AI.

3. Perhaps most puzzling, the AI suggests that a business with its own employees could itself be an employee of another business with which it has a contractual relationship:  "If the intermediary employer is an employer off the potential joint employer, than all of the intermediary employer's employees are employees of the potential joint employer too, and there is no need to conduct a vertical joint employment analysis."  Tying this AI to the AI issued last summer on independent contracting, Administrator's Interpretation FLSA 2015-1 (July 15, 2015), the WHD provides an example from the construction industry:  "Likewise, if a drywall subcontractor is not actually an independent contractor but is an employee of the higher-tier contractor, then all of the drywall subcontractor's workers are also employees of the higher-tier subcontractor."  In our experience, however, it is unlikely that a court would find an independent business with its own employees to be an employee itself, rather than a bona fide  independent contractor.

4. 29 C.F.R. §.791.2(b).

5. David Weil, Improving Workplace Conditions Through Strategic Enforcement: A Report to the Wage and Hour Division (May 2010), available at  http://www.dol.gov/whd/resources/strategicenforcement.pdf.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Tammy McCutchen
Michael J. Lotito
 
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