For the first time in more than 60 years, the U.S. Department of Labor (DOL) updated and revised its regulations for determining joint employer status under the Fair Labor Standards Act (FLSA), which governs federal minimum wage, overtime, hours worked, and recordkeeping obligations.
Over time, federal circuit courts have developed a number of different approaches for determining joint employer status, resulting in uncertainty for employers and workers, as well as increased compliance and litigation costs. The final rule issued by the DOL is intended to reduce uncertainty over joint employer status, promote greater uniformity among court decisions, reduce litigation, and encourage innovation in the economy.
The DOL’s Joint Employer Rule
The new rule, which took effect on March 16, 2020, limits the situations under which employers, such as contractors and subcontractors, are considered to jointly employ a group of workers under the FLSA. Under the FLSA, entities or individuals may be considered a “joint employer,” and therefore jointly and severally liable for the FLSA obligations, if it exercises sufficient control over the terms and conditions of another’s employer’s workers. But what exactly does that mean?
The DOL’s final rule sets forth a four-factor balancing test, replacing the previously applicable “not completely dissociated” standard, to assist employers with determining whether it will share liability for FLSA violations. To determine whether a second individual or entity is a joint employer of a worker, the DOL will examine whether the putative joint employer:
- Hires or fires the employee;
- Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
- Determines the employee’s rate and method of payment; and
- Maintains the employee’s employment records.
The new rule makes clear that no single factor is dispositive in determining joint employer status, and the weight of each of the factors may vary based on the facts of each case.
Most notably, the new rule rejects the degree of “economic dependence” between the two putative joint employers and identifies additional factors which, standing alone, are insufficient to establish joint employer status:
- Operating as a franchisor.
- Maintenance of an employee’s employment records.
- Unexercised ability to control an employee’s conditions of employment.
- Contractual agreements related to compliance with legal obligations or standards.
- Contractual requirements related to quality control standards.
- Provision of a sample employee handbook.
- Allowing an employer to operate a business on its premises.
- Offering an association health plan or association retirement plan.
According to the DOL, “[t]o make joint-employer status more or less likely, the potential joint employer would have to not only provide such resources but would also have to somehow exercise control over the employees in relation to those resources.” In other words, a second employer must go beyond simply making resources available and must, instead, actually exercise control — directly or indirectly — over the various aspects of employment. For purposes of this rule, an employer exercises indirect control over an employee through mandatory directions to another employer that directly controls the employee. Merely reserving the right to control the employee’s working conditions or acting in a way that incidentally impacts the employee, however, does not indicate joint employer status.
The final rule provides a number of examples illustrating the application of the four-factor test to these and other business-to-business scenarios, intended to provide more practical guidance to employers with potential joint employment concerns.
Joint employers under the new DOL rule may be held jointly and severally liable for FLSA wage and hour obligations, including minimum wage or overtime. Joint employers may also be liable for violations of the Family and Medical Leave Act (FMLA), the Americans with Disabilities Act (ADA), Title VII and other employment discrimination laws, and workers compensation laws.
The NLRB’s Joint Employer Rule
The new rule above applies only to the DOL’s interpretation of the FLSA. As such, it does not address “joint employer” status under other federal employment laws, such as the National Labor Relations Act (NLRA).
Like the DOL, the National Labor Relations Board (NLRB) issued its final rule interpreting joint-employer status under the NLRA, which went into effect on April 27, 2020.
Under the final rule, a business will be deemed a joint employer only if it “shares and codetermines” one or more of the essential terms and conditions of employment of another employer’s employees. The essential terms subject to NLRB scrutiny include wages, benefits, work hours, hiring, discharge, supervision, and direction. In other words, an employer shares and codetermines such essential terms if it possesses and exercises substantial control over the employer’s employees such that the putative employer “meaningfully affects matters relating to the employment relationship with those employees.”
Importantly, evidence of indirect or contractually reserved control over essential employment terms and conditions may be a consideration for finding joint employer status, but is not, by itself, sufficient without further evidence of direct or immediate control over the employees in questions. The NLRB’s rule distinguishes between exercising indirect control and exerting control or influence over setting contractual objectives, expectations, or ground rules. The determination of whether an employer exercises indirect control over essential work terms or exerts control over conditions or expectations as to how a contract is to be performed “is an issue of fact to be determined on a case-by-case basis.”
Practically speaking, the NLRB’s joint-employer standard is significant to businesses because it determines whether a business: (1) has an obligation to bargain with labor unions representing workers employed by another entity; (2) is subject to union picketing or other labor dispute-related activities involving another entity’s employees; and (3) is jointly and severally liable for any unfair labor practices committed by another entity against its employees.
Shifting the Burden of Joint Employment Liability
While contract provisions regarding joint employment will not be determinative under either the DOL or NLRB rules, careful drafting can shift the costs of a joint employment determination. Construction companies acquiring labor from a third party, particularly staffing companies, should include contractual protections such as indemnification provisions, duty to defend clauses, and hold harmless clauses.
When drafted properly, these contract provisions would require the actual employer to defend the prospective joint employer against an adverse ruling on joint employment status and reimburse its costs in the event of a joint employment determination. Employers assessing their potential status as a joint employer should consult with counsel to ensure compliance with all applicable standards.
The final rules issued by the DOL and the NLRB effectively narrows the definition of “joint employer,” providing employers with much-needed clarity and encouraging greater uniformity in application.
It should be noted, however, that the new rules are not binding authority on the federal courts, nor do the new rules modify interpretations of joint employer status under state wage and hour laws.
For employers, particularly in those situations where an employee performs work for an employer and that work simultaneously benefits another employer, the new rules make it easier to comply with and understand the various obligations under the FLSA and the NLRA. Close adherence to the new rules, and making a conscious effort to mitigate potential liability, will certainly reduce compliance and litigation costs and give employers greater certainty in structuring their business relationships.
About the author: Keith A. Boyette is an attorney with Anderson Jones, PLLC. His practice areas include general civil litigation, commercial and construction litigation, lien and bond claims, and real property litigation. Questions about this article can be directed to him at KBoyette@andersonandjones.com.
Author’s note: This article is intended only for informational purposes and should not be construed as legal advice.