Who’s The Boss? The Department of Labor’s Effort to Expand Joint Employer Liability Under the FLSA

By Kate S. Gold and Philippe A. Lebel

On January 20, 2016, the U.S. Department of Labor’s (“DOL”) Wage and Hour Division issued an Administrator’s Interpretation (“Interpretation”) significantly expanding the definition of a “joint employer” under the Fair Labor Standards Act (“FLSA”), 29 U.S.C. §§ 201 et seq. The DOL’s new approach, which relies in part on regulations promulgated under the Migrant and Seasonal Worker Protection Act (“MSPA”), 29 U.S.C. §§ 1801, shifts the focus of the analysis toward “economic realities.” If followed, the DOL’s approach potentially expands liability for wage and hour violations such as overtime pay to entities that do not directly employ workers, but that have contracted with third parties for labor.

In the introductory paragraphs of the Interpretation, the DOL implies its motive in promulgating the new standard is to protect a larger number of workers and to address purported efforts by employers to shield themselves from wage and hour liability using multi-tiered workforce structures. Although the Interpretation is not binding on courts, it may be cited as persuasive authority in litigation, and could significantly expand the number of companies subject to joint employer liability under the FLSA.

Two Types of Potential Joint Employer Arrangements

The Interpretation focuses on two types of potential joint employer relationships: (a) horizontal joint employment; and (b) vertical joint employment.

Horizontal joint employment “exists where the [putative] employee has employment relationships with two or more employers and the employers are sufficiently associated or related with respect to the employee such that they jointly employ the employee.” In the case of horizontal joint employment, there is typically an undisputed employer-employee relationship between each potential joint employer, individually, and the employee in question. For example, a horizontal joint employment scenario may exist for a waitress who works for two different restaurants that are owned by the same entity.

Vertical joint employment “exists where the employee has an employment relationship with one employer . . . and the economic realities show that he or she is economically dependent on, and thus employed by, another entity involved in the work.” In this type of potential joint employment arrangement, the putative joint employer is usually the (indirect) beneficiary of the employee’s work, contracted through an intermediary. However, unlike in the context of horizontal joint employment, the putative joint employer in a vertical joint employment inquiry would not have an admitted employment relationship with the putative employee. One example of this type of potential joint employment is a nurse placed at a hospital by a staffing agency.

Factors to Consider When Determining Whether Horizontal Joint Employment Exists

Relying largely on regulations and case law developed under the FLSA, the Interpretation identifies a number of non-exhaustive facts that should be considered in determining whether a horizontal joint employment relationship exists. They include:

  1. Who owns the potential joint employers (e., does one company own part or all of the other or do they have any common owners);
  2. Do the potential joint employers have any overlapping officers, directors, executives, or managers;
  3. Do the potential joint employers share control over operations, including hiring, firing, payroll, advertising, and/or overhead costs;
  4. Are the potential joint employers’ operations inter-mingled;
  5. Does one potential joint employer supervise the work of the other;
  6. Do the potential joint employers share supervisory authority for the employee;
  7. Do the potential joint employers treat the employees as a pool of employees available to both of them;
  8. Do the potential joint employers share clients or customers; and
  9. Are there any agreements between the potential joint employers.

The Interpretation states that the above factors need not all be present for a horizontal joint employment relationship to exist. However, if the employers are “acting entirely independently of each other and are completely disassociated” with respect to an employee, no horizontal joint employment relationship will exist. The central focus is the relationship between the two potential joint employers.

Vertical Joint Employment: A Major Departure

Before the Interpretation, various federal circuit courts had developed their own multifaceted tests for determining whether two employers could be liable as joint employers pursuant to the FLSA. Though the standards varied, a majority shared a common focus on the degree of putative employers’ control over the putative employees.

While the Interpretation continues to focus on control in the context of horizontal joint employment relationships, the DOL departed from that focus with respect to vertical joint employers. Under the new formulation, determining whether a vertical joint employment relationship exists is a two-part process. First, consideration must be given to whether the “intermediary employer” (either an individual or an incorporated entity) is an employee of the putative joint employer (e.g., is a farm labor contractor actually an employee of the grower, and not an independent contractor?). If so, “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 employer analysis.”

If the intermediary employer is not an employee of the putative joint employer, focus shifts to the “economic realities” analysis. Control cannot be the predominant consideration – as it had been in the past. Rather, the “core question” is “whether the [putative] employee is economically dependent on the potential joint employer who, via an arrangement with the intermediary employer, is benefitting from the work” (emphasis added).

In determining whether there is the requisite degree of economic dependence, the Interpretation recites seven factors that developed under the MSPA – a law governing agricultural workers – based on regulations implemented almost 20 years ago:

  1. Whether and to what extent the work performed by the putative employee is controlled or supervised (directly or indirectly) by the putative joint employer beyond a reasonable degree of contract performance oversight.
  2. Whether the putative joint employer controls the employment conditions, including whether the putative joint employer has the authority to hire or fire the employee, modify employment conditions, or determine the rate or method of pay.
  3. The degree of permanency and duration of the relationship, taking into consideration the industry in which the relationship exists.
  4. The extent to which the putative employee’s work for the putative joint employer is repetitive and rote, is relatively unskilled, and/or requires little or no training.
  5. Whether the work performed by the putative employee is an integral part of the putative employer’s business.
  6. Whether the work is performed on the putative joint employer’s premises. (It is immaterial whether the putative joint employer leases as opposed to owns the premises where the work is performed, so long as the putative employer controls the premises.)
  7. Whether and to what extent the putative 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.

The Interpretation notes that some previous judicial standards focused only or primarily on factors relevant to the putative employer’s level of control (e.g., ability to hire and fire, supervision of the work, determining method and rate of pay). But the Interpretation takes the position that a limited, control-dominated analysis is inconsistent with “the breadth of employment under the FLSA.”

The result of the DOL’s broad, economic-driven approach may be that many companies that have contracted with third-party staffing providers will find themselves swept within the ambit of the FLSA if the Interpretation’s seven-factor analysis is applied. For example, the analysis above may result in a finding of a joint employment relationship where two entities are entirely economically dependent, but share little or no control over the putative employees. Note that the DOL’s new standard departs from many of the state common law formulations of the joint employer relationship, which may be more lenient for employers. On the other hand, some states, like California, have already expanded the scope of joint employer liability through the use of statutes imposing liability on customers of labor contractors. See, e.g., Cal. Lab. Code § 2810.3.

Takeaways

The Interpretation is not binding on courts, but may, nonetheless, be regarded (and cited) as persuasive authority, and will certainly guide the DOL’s own approach to potential joint employment enforcement under the FLSA. Although the Interpretation arguably does not alter the analysis for potential horizontal joint employment, it significantly changes the analysis for potential vertical joint employment. Accordingly, companies using third-party labor providers should carefully examine their risk of potential vertical joint employment liability, with an eye on the seven factors above. Unlike in the past, the focus should be on the level of economic dependence, as opposed to just control.

In addition to exploring restructuring of relationships with third-party labor providers, companies may wish to consider adding terms to contracts with labor providers entitling the companies to guarantees of wage and hour compliance, and providing the companies the right to audit labor providers’ compliance with wage and hour law. To further mitigate risk under the DOL’s new standard, companies may consider including indemnification provisions in agreements with third-party labor providers.

Employers Should Not Rely on Employer Handbooks to Create Enforceable Arbitration Agreements

By Vik C. Jaitly

In a recent published opinion, the New Jersey Appellate Division held that an arbitration clause in an employee handbook was unenforceable because the handbook also contained standard disclaimer language stating that the handbook did not create an employment contract. The Court’s decision, in Morgan v. Raymours Furniture Co., Slip Op. A-2830-14T2, 2015 WL 9646045 (N.J. App. Div. Jan. 7, 2016), makes clear that arbitration agreements should ideally be separate, stand-alone documents, not provisions in employee handbooks.

On three occasions during the course of his employment with defendant Raymours Furniture Company (“Raymours”), plaintiff Grant Morgan acknowledged receipt of an employee handbook. The handbook included a mandatory arbitration clause and a waiver of the employee’s right to sue in court. According to Morgan, after he complained about age discrimination in the workplace, Raymours presented him with a separate, stand-alone arbitration agreement and told him to sign the agreement or Raymours would terminate his employment. Morgan refused to sign and Raymours fired him.

Morgan filed a lawsuit against Raymours (and two individual Raymours managers) asserting age discrimination under the New Jersey Law Against Discrimination, wrongful termination and other causes of action. The defendants filed a motion to compel arbitration. The trial judge denied the motion, and the defendants appealed.

In reviewing the trial court’s decision, the Appellate Division considered the disclaimer contained in the employee handbook, which stated:

“Nothing in this Handbook or any other Company practice or communication or document, including benefit plan descriptions, creates a promise of continued employment, [an] employment contract, term or obligation of any kind.”

The Court also considered the text of the electronic form on which Morgan had acknowledged receipt of the employee handbook, which stated that the employee received the handbook and:

“understand[s] that the rules, regulations, procedures and benefits contained therein are not promissory or contractual in nature and are subject to change by the company.”

The Court recognized that Raymours included these disclaimers because of New Jersey Supreme Court precedent in Woolley v. Hoffman-LaRoche, Inc., 99 N.J. 284, 309, modified, 101 N.J. 10 (1985), holding that they may be necessary to defeat a claim that the handbook created implied contractual rights and duties. Nonetheless, the Morgan Court explained that “it is simply inequitable for an employer to assert that, during its dealings with its employee, its written rules and regulations were not contractual and then argue, through reference to the same materials, that the employee contracted away a particular right.” Moreover, the Court explained, for an arbitration clause to be enforceable, the employee must “clearly and unambiguously” agree to a waiver of his or her right to sue.

In light of the disclaimers, the Court concluded that Morgan had not clearly and unambiguously agreed to waive his right to sue. The Court reasoned that by “inserting such a waiver provision in a company handbook, which, at the time, the employer insisted was not ‘promissory or contractual,’ an employer cannot expect – and a court, in good conscience, will not conclude – that the employee clearly and unambiguously agreed to waive the valued right to sue.” The Court further reasoned that merely obtaining Morgan’s acknowledgment that he received the handbook did not constitute his agreement not to sue. The Appellate Division affirmed the trial court’s decision denying the motion to compel arbitration.

One’s immediate reaction to the Morgan decision may be that it leaves employers with two untenable options. They can either: (1) issue handbooks with enforceable arbitration provisions that may inadvertently create contractual rights for employees; or (2) issue handbooks with unenforceable arbitration provisions that will not inadvertently create contractual rights for employees. However, employers also have a third, better option. An employer wishing to implement a mandatory arbitration program should require employees to sign a separate, stand-alone agreement in which the employee clearly and unambiguously agrees to arbitration. Meanwhile, employers should continue to include Woolley disclaimers in their handbooks. Overall, while arbitration programs offer many benefits, it is critical that employers exercise great care to ensure that they are enforceable.

Don’t Labor Under New Laws — What Employers Need to Know About 2016 California Labor Laws

By Mark Terman

*Originally published by CalCPA in the January/February 2016 issue of California CPA — the original article can be found here.

Many California employers feel over-regulated—and under-appreciated. Yet, surprisingly, proposed new regulation of employers has declined. In 2015, 224 bills introduced in the California Legislature mention “employer,” compared to 574 in 2014. Most of those bills did not pass, and of the ones that did, most were not signed into law by Gov. Brown. One veto blocked a bill (AB 465) that would have made pre-dispute arbitration agreements made as a condition of employment—the kind that are in widespread use across the state—unlawful. Another veto rejected a bill (AB 676) reintroduced this year that would have penalized employers for limiting job prospects of, or discriminating against, applicants who are not currently employed.

Key elements of some of the bills that became law affecting private employers, effective Jan. 1, 2016, unless otherwise mentioned and organized by bill number, follow.

Minimum Wage Boost

As of Jan. 1, the state minimum wage for non-exempt workers will increase to $10 per hour, up from $9. This change also impacts classification of most exempt workers. In addition to strict “duties tests” for administrative, executive and professional wage and hour exemptions, a salary of at least twice the state minimum wage must be paid to meet the “salary basis test.” That increases the annualized exempt salary requirement to $41,600, up from $37,440. Also affected is the retail inside-sales exemption, which requires employees be paid at least 1.5 times the state minimum wage, and at least half of their other earnings be from commissions.

An increasing number of municipalities have increased the minimum wage for companies who employ workers in their jurisdiction. As of July 1, minimum wage at Los Angeles employers with 26 or more employees will increase to $10.50 per hour, and will increase annually up to $15 per hour by July 1, 2021. Minimum wage for employees in San Francisco increased to $12.25 from $11.05 per hour May 1, 2015, and will incrementally increase to $15 per hour by July 1, 2018. Many other cities, including Berkley, Oakland and San Diego have either enacted or have pending minimum wage laws. In addition, living wage laws may require higher minimum wages be paid as a condition of contracting with local, state or federal agencies. Employers should monitor each of the requirements to assure compliance.

Penalties for Pre-offer E-Verify Use

Employers may hire only individuals who have the right to work in the United States—either U.S. citizens or foreign citizens with authorization issued by the federal government. E-Verify, administered by the United States Citizenship and Immigration Services, Department of Homeland Security (DHS) and Social Security Administration (SSA), is an internet-based system that allows employers to determine the eligibility of their employees to work in the United States.

AB 622 continues a California law trend to prevent employment discrimination of immigrants. The new law prohibits employers from using E-Verify to check the employment authorization status of employees or applicants who have not received an offer of employment. Post-offer use of E-Verify remains lawful, as does use required by federal law (such as certain federal contractors) or as a condition of receiving federal funds. In addition to other remedies that may be available, the new law establishes a civil penalty not to exceed $10,000 for each unlawful use of the E-Verify system.

AB 622 also mandates employers provide to the affected worker—as soon as practicable—any DHS or SSA notification containing information specific to the worker’s E-Verify case or any nonconfirmation notice, indicating that the E-Verify data entered does not match federal records.

More Labor Commissioner Enforcement Powers

AB 970 expands the Labor Commissioner’s power to enforce local laws regarding overtime and minimum wage, and to issue citations and penalties for violations, except when the local entity has already issued a citation for the same violation.

Labor Code Sec. 2802 requires employers to indemnify for expenses or losses incurred by the employee in direct consequence of the discharge of the employee’s duties or as a result of obeying the employer’s directions. In addition to a private right of action by the employee to recover these expenditures, AB 970 authorizes the Labor Commissioner to issue citations and penalties against employers who violate Sec. 2802.

Employment Discrimination Clarified

AB 987 clarifies that it is an unlawful employment practice under the Fair Employment and Housing Act for an employer to retaliate or otherwise discriminate against an employee for “requesting” an accommodation for a disability or religious belief or observance, regardless of whether the request was granted.

Employers Can Cure Some Violations to Avoid PAGA

California’s Private Attorneys General Act of 2004 (PAGA) permits an employee to sue to recover civil penalties for certain alleged Labor Code violations that could otherwise be pursued by the Labor and Workforce Development Agency on behalf of the employee and other current or former employees. Employee-side litigants have used the act to leverage penalties on a workforce-wide basis for technical Labor Code violations, even where the employee has not been damaged.

As of Oct. 2, 2015, AB 1506 allows employers the opportunity to correct itemized wage statements (i.e., paystubs) to include missing inclusive dates of the pay period and the name and address of the legal employer, to avoid a PAGA action over those defects. The employer may cure the alleged violation within 33 calendar days of the postmark date of the PAGA notice it receives. The bill requires only a showing that the employer has provided fully compliant paystubs to each aggrieved employee to establish cure.

Whistleblowers’ Family Members Protected

Labor Code secs. 98.6, 1102.5 and 6310 generally prohibit an employer from discharging or taking other adverse action against any employee or applicant who has complained about unlawful discrimination, retaliation or any adverse action; engaged in whistleblowing activity; or complained about unsafe working conditions.

AB 1509 provides that an employer, or a person acting on behalf of the employer, shall not retaliate
against an employee because the employee is a family member of a person who has, or is perceived to have, engaged in any acts protected by these provisions. The term “employer” or “person acting on their behalf ” includes “client employers” (i.e., a business entity that obtains or is provided workers to perform labor within its usual course of business from a labor contractor) or a “controlling employer” (i.e., an employer listed in Labor Code Section 6400(b) regarding multiemployer worksites).

Piece-Rate Worker Pay Requirements

AB 1513, which adds new Labor Code Sec. 226.2 and repeals others, applies to employees who are
compensated on a piece-rate basis for any work performed during a pay period. This new law requires that employees be compensated for rest and recovery periods and “other nonproductive time” separate from any piece-rate compensation as follows:

Rest and recovery periods must be compensated at a regular hourly rate that is no less than the higher of: (i) an “average hourly rate” determined by dividing the total compensation for the workweek, exclusive of compensation for rest and recovery periods and any premium compensation for overtime, by the total hours worked during the workweek; or (ii) the “applicable minimum wage,” defined by the bill as “the highest of the federal, state or local minimum wage applicable to the employment.”

Certain employers, who comply with the applicable minimum wage requirement, have until April 30 to program their payroll systems to perform and record the calculation required under the average hourly rate requirement and comply with the itemized wage statement requirements (see below), so long as such employers pay piece-rate employees retroactively for all rest and recovery periods at or above the applicable minimum wage from Jan. 1–April 30, inclusive, and pay the difference between the amounts paid and the amounts that would be owed under the average hourly rate requirement, together with interest.

Other nonproductive time is that which is under the employer’s control, exclusive of rest and recovery periods, and not directly related to the activity being compensated on a piece-rate basis. That time must be compensated at an hourly rate that is no less than the applicable minimum wage. The amount of other nonproductive time may be determined either through actual records or the employer’s reasonable estimates, whether for a group of employees or for a particular employee, of other nonproductive time worked during the pay period.

Finally, in addition to the list of items required by Labor Code Sec. 226 for itemized wage statements, Sec. 226.2 requires that the statements include the:

  • Total hours of compensable rest and recovery periods;
  • Rate of compensation; and
  • Gross wages paid for those periods during the pay period.

Employers who do not pay an hourly rate for all hours worked in addition to piece-rate wages must also list on the itemized statements the total hours of other nonproductive time, rate of compensation for that time and gross wages paid for that time during the pay period.

Hospital Meal Period Waivers

For non-exempt employees, Labor Code Sec. 512 requires two meal periods for work periods of more than 10 hours. However, employees are allowed to waive their second meal period if the total hours worked in their shift are no more than 12. Effective Oct. 5, 2015, SB 327 made statutory the longstanding rule under Sec. 11(D) of Wage Order 5 that health care industry employees who work shifts in excess of eight total hours in a workday are permitted to waive their second meal period. The bill effectively sets aside a contrary appellate court decision.

Equal Pay Act for Substantially Similar Work

SB 358, known as the California Fair Pay Act (CFPA), subjects employers to one of the strictest and most aggressive equal pay laws in the country.

Under the CFPA, an employer is prohibited from paying employees of the opposite sex lower wage
rates for “substantially similar work, when viewed as a composite of skill, effort and responsibility, and performed under similar working conditions.”

Previously, the equal pay statute was more limited. It prohibited employers from paying employees of the opposite sex in the same establishment for equal work on jobs the performance of which requires equal skill, effort and responsibility, and performed under similar working conditions. The standard permits employees to bring an unequal pay claim based on wage rates in any of their employer’s facilities and in other job categories as long as the work is substantially similar.

The employer’s defense burden has increased under the CFPA. An employer must establish that the entire wage differential is based on the reasonable application of one or more of the following:

  • A seniority system;
  • A merit system;
  • A system which measures earnings by quantity or quality of production; or
  • A bona fide factor other than sex—such as education, training or experience.

The last factor will apply if the employer shows that the factor is not the result of a sex-based differential in compensation, is related to the position and is consistent with business necessity. An employee can defeat this defense by proving that an alternative business practice exists that would serve the same business purpose without producing the wage differential.

Seeking to decrease pay secrecy, the CFPA further prohibits employers from enacting rules, policies or otherwise engaging in conduct that prohibits employees from disclosing their own wages, discussing the wages of others, asking about other employees’ wages or aiding and encouraging employees to exercise rights under the CFPA. Yet, no one, including an employer, is obligated to disclose employees’ wages.

Finally, the CFPA prohibits discharge, discrimination and retaliation of employees for asserting rights under the act. The statute, as amended by the CFPA, permits a civil action seeking reinstatement, lost wages and interest, an equal amount as liquidated damages, lost benefits, other equitable relief and attorneys fees recovery. Finally, the CFPA requires that employers maintain records of employees’ “wages and rates of pay, job classifications, and other terms and conditions of employment” for a three-year period.

Wage Garnishment Restrictions

SB 501 amends, repeals and adds Sec. 706.050 of the Code of Civil Procedure, relating to wage garnishment. The new law reduces the prohibited amount of an individual judgment debtor’s weekly disposable earnings subject to levy under an earnings withholding order from exceeding the lesser of 25 percent of the individual’s weekly disposable earnings or 50 percent of the amount by which the individual’s disposable earnings for the week exceed 40 times the state minimum hourly wage, or applicable local minimum hourly wage, if higher, in effect at the time the earnings are payable.

Employee Time Off

California’s Kin Care Law allows employees to use half of their accrued sick leave to care for a “family member” (as defined). The Healthy Workplaces, Healthy Families Act (Paid Sick Leave Act) SB 579, which went into effect July 1, requires certain mandatory accrual of paid sick days. The bill effectively trues-up the two statutes by defining “sick leave” as leave provided for use by the employee during an absence from employment for purposes permitted by the Paid Sick Leave Act; prohibiting an employer from denying an employee the right to use sick leave; and taking specific discriminatory action against an employee for using, or attempting to exercise the right to use, sick leave for these purposes.

In other words, employees may use paid sick leave for their own health condition or preventative care, a family member’s health condition or preventative care, and if the employee is a victim of domestic assault, sexual violence and stalking. Further, “family member” now includes a child, regardless of age or dependency (including adopted, foster, step or legal ward), parent (biological, adoptive, foster, step, in-law or registered domestic partner’s parent), spouse, registered domestic partner, grandparent, grandchild or siblings.

The Family School Partnership Act applies only to employers with 25 or more employees and permits an employee—defined as a parent, guardian or grandparent having custody of a child in school (grades 1–12) or child day care facility—unpaid leave of up to 40 hours each year (and no more than eight hours in a calendar month) to participate in school activities, subject to specified conditions. SB 579 amends this act by changing its scope from “child day care facility” to “child care provider” and adding leave rights for stepparents or foster parents, or one who stands in loco parentis to a child. The new law also allows employees to take unpaid time off to enroll or reenroll their children in a school or with a licensed child care provider.

Even More Labor Commissioner Enforcement Powers

SB 588 provides the California Labor Commissioner with additional powers to enforce judgments against employers arising from the employers’ nonpayment of wages. The new law, among other things, authorizes the Labor Commissioner to use any of the existing remedies available to a judgment creditor and to act as a levying officer when enforcing a judgment pursuant to a writ of execution; and issue a notice of levy if the levy is for a deposit, credits, money or property in the possession or under the control of a bank or savings and loan association or for an account receivable or other general intangible owed to the judgment debtor by an account debtor.

If an employer fails to pay a judgment for unpaid wages within 30 days of it becoming “final” (i.e., exhaustion of appeals), the employer must stop doing business in California unless it posts bond up to $150,000 (depending on the unsatisfied portion of the judgment). And the Labor Commissioner can issue a “stop order” to suspend all business operations to enforce this new provision.

What’s Next?
Employers should consider how these new laws impact their workplaces, and then review and update their personnel practices and policies with the advice of experienced attorneys or human resource professionals.