A business is a joint employer of another employer’s employees only if the two employers share or codetermine the employees’ essential terms and conditions of employment, according to a recently unveiled and long-awaited final rule from the National Labor Relations Board (NLRB) that will take effect on April 27, 2020. By tightening the legal test the NLRB uses to determine whether workers are jointly employed by affiliate businesses, including franchisors and franchisees, the rule provides welcomed clarity for franchisors, and will allow them to provide more operational support and guidance to franchisees.
On June 7, 2017, U.S. Secretary of Labor Alexander Acosta announced that the U.S. Department of Labor (DOL) is withdrawing two major pieces of informal guidance issued during the Obama administration, pertaining to joint employment and independent contractors under the Fair Labor Standards Act (FLSA), 29 U.S.C. §§ 201 et seq.
The two Administrator Interpretations Letters were issued by the former head of the DOL’s Wage and Hour Division, David Weil. The first guidance letter, Administrator’s Interpretation No. 2015-1, took an aggressive position regarding misclassification of employees as independent contractors. It stressed that the “economic realities” of worker-employer relationships were paramount—i.e., whether, as a matter of economic reality, a worker was dependent on the putative employer—and suggested that most workers should be classified as employees. Although it relied on case law, the Administrator Letter provided additional refinements and, significantly, de-emphasized consideration of “control”—a major element under most common law tests.
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:
- Who owns the potential joint employers (e., does one company 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, including hiring, firing, payroll, advertising, and/or overhead costs;
- Are the potential joint employers’ operations inter-mingled;
- 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.
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:
- 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.
- 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.
- The degree of permanency and duration of the relationship, taking into consideration the industry in which the relationship exists.
- 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.
- Whether the work performed by the putative employee is an integral part of the putative employer’s business.
- 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.)
- 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.
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.