The Department of Labor has issued its Final Rule explaining when separate companies will be deemed joint employers of a single employee under the Fair Labor Standards Act. In so doing, the DOL has made findings of joint employer status to be less likely, including in franchise situations.
Background. Under the FLSA, several entities may be the joint employers of a single employee as long as they are “not completely disassociated” with respect to the employment of the employee. These joint employers are then jointly and severally liable for the employee’s wages. The new joint employer Rule contemplates two different joint employment scenarios: (1) where an employee’s hours worked for one employer simultaneously benefits another employer; and (2) where the employee works separate sets of hours for different employers in the same workweek.
The joint employer Rule has not been meaningfully revised in over 60 years. In 2016, the DOL under the Obama administration issued an Administrator Interpretation (AI) in which it adopted an expansive “economic realities” test to assess joint employer status. This test heavily favored the finding of such status. The Trump DOL, however, withdrew the AI in June 2017, and issued a Proposed Rule earlier this year.
The Final Rule – Scenario One. In addressing the first joint employment scenario, the DOL assesses joint employer status by examining whether the potential joint employer is acting directly or indirectly in the interest of the employer in relation to the employee. Under a four-factor test, the DOL examines whether the potential joint employer:
- hires or fires the employee;
- supervises and controls the employee’s work schedules 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 DOL states that the joint employer determination will depend on all the facts in a particular case, with the weight given each factor varying depending on the circumstances. The DOL noted, however, that maintenance of employment records (i.e. those related to the hiring, firing, supervision, control of the work schedules or conditions of employment, or determining the rate and method of payment of the employee) alone will be insufficient to support a joint employer finding. The DOL acknowledges that other factors may be relevant, but only if indicative of whether the potential joint employer is exercising significant control over the terms and conditions of the employee’s work.
Of particular note, the potential joint employer must actually exercise the power to take these specifically identified or other such actions – the ability or reserved right to do so will not alone trigger joint employer status.
The DOL stated that an employer may be found to be acting “indirectly” in the interest of another employer when it issues mandatory directions to the other employer that directly controls the employee. One company’s voluntary compliance with the other’s suggestion, recommendation or request does not constitute indirect control, however. Neither do acts that incidentally impact the employee – such as one company’s request for lower costs or fees, which could result in lower wages for the other company’s employee.
The DOL further states that an employee’s “economic dependence” on the potential joint employer is not determinative of liability under the FLSA. The DOL identifies four “economic dependence” factors that it deems to be irrelevant to the joint employer analysis, as such factors are only relevant to whether an individual is an employee or an independent contractor, and not on whether the potential joint employer is acting directly or indirectly in the interest of the employer in relation to the employee:
- the employee is in a specialty job or one requiring special skill, initiative, judgment or foresight;
- the employee has the opportunity for profit or loss based on managerial skill;
- the employee invests in equipment or materials required for work or the employment of helpers; and
- the number of contractual relationships, other than with the employer, that the potential joint employer has entered into to receive similar services.
The DOL clarifies with specificity certain common-place situations that “do not make joint employer status more or less likely under the [FLSA]”:
- operating as a franchisor or entering into a brand and supply agreement, or using a similar business model;
- the potential joint employer’s contractual agreements with the employer requiring the employer to comply with its legal obligations or to meet certain standards to protect the health or safety of its employees or the public;
- the potential joint employer’s contractual agreements with the employer requiring quality control standards to ensure the consistent quality of the work product, brand, or business reputation; and
- the potential joint employer’s practice of providing the employer with a sample employee handbook, or other forms, allowing the employer to operate a business on its premises (including “store within a store” arrangements), offering an association health plan or association retirement plan to the employer or participating in such a plan with the employer, jointly participating in an apprenticeship program with the employer, or any other similar business practice.
Scenario Two. As for the second joint employer scenario, involving different hours of work for different employers within the same workweek, the DOL stated that it was not making any substantive changes to the existing standard. Thus, if the employers are acting independently and are disassociated with regard to the individual’s employment, they are not joint employers under the FLSA. If they are sufficiently associated, however, they will be deemed joint employers. Sufficient association exists if:
There is an agreement 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, because one employer controls, is controlled, by, or is under common control with the other employer.
Examples. The DOL also offered multiple examples of when joint employer status will and will not be found.
Joint employer status does not exist in the following examples:
- An employee works as a cook for different franchisees of the same nationwide franchisor. The two franchisees do not act in each other’s interest, either directly or indirectly.
- A janitorial services company has an agreement to clean an office park building, under which the building agrees to pay a fixed fee and reserves the right to supervise the janitorial employees in their performance of cleaning services, but does not actually exercise the right of supervision. The reserved right does not demonstrate joint employer status.
- A restaurant has a contract with a cleaning service that does not give it authority to hire or fire the cleaning company’s employees or supervise their work. A restaurant official provides general instructions to the cleaning company’s team leader about tasks to be performed, monitors performance of the work, and keep records tracking completed assignments. The cleaning company decides to terminate an employee at the request of the restaurant for customer safety issues. The restaurant’s instructions and monitoring are too limited for joint employer status. Maintenance of records does not establish such status. The decision to comply with the termination request was voluntary, and does not indicate indirect control.
- A packaging company pays a fixed fee to a staffing agency for each worker assigned to unfilled shifts. The staffing agency determines the rate of pay, number of shifts, and which workers will be assigned. The packaging company provides limited supervision to satisfy minimal quantity, quality, and workplace safety standards. There is more strict supervision from an on-site staffing company supervisor. The packaging company’s exercise of limited supervision is not sufficient to establish joint employer status, particularly in light of the staffing agency’s supervision.
- An association provides optional group health coverage and an optional pension plan to its entity members, and entity members participate in the benefit plans. There is no control by the association over the entity members’ employees, or by one entity over the other’s employees, and they are not acting directly or indirectly in the interest of the other.
- A large company requires companies in its supply chain to comply with its code of conduct, which includes a minimum wage rate higher than the federal rate. The company is not acting directly or indirectly in the interest of the supply company in relation to the supply company’s employees.
- A global franchisor provides a franchisee with proprietary software for business operation or payroll processing, a sample employment application, handbook and other forms and documents. The franchisee is responsible for all day-to-day operations. The franchisor does not exercise direct or indirect control over the franchisee’s employees.
- A retail company contracts with a cell phone repair company to allow the repair company to run its business operations inside the retail company’s premises, and requires the repair company to have repair employees wear substantially similar shirts to its own employees and to institute a code of conduct requiring professional interactions with customers. The dress policy and code of conduct do not demonstrate substantial control over the repair employees by the retail company.
Joint employer status exists in the following examples:
- An employee works at different restaurant establishments owned by the same person, whose schedule is coordinated and wage rate agreed on by the restaurants, since restaurants are sufficiently associated.
- A restaurant has a contract with a cleaning service that does not give it authority to hire or fire the cleaning company’s employees or supervise their work. In practice, however, a restaurant official assigns tasks directly to the cleaning service employees, provides hands-on instruction, and maintains records of work hours. The cleaning company also agreed to terminate individuals workers without question on several occasions. This indicates both direct and indirect control over the terms and conditions of the employees’ employment.
- A packaging company utilizes a staffing agency, where it determines the rate of pay, supervises the work, and adjusts the number of workers and hours worked by each employee. The packaging company exercises sufficient control over the terms and conditions of employment.
What Next? The Final Rule takes effect on March 16, 2020. Employers should note that the Rule constitutes the DOL’s interpretation of the FLSA, but does not constitute law. Courts are free to adopt or reject the Rule, although most courts will find such agency Rules to be “persuasive” authority.
Of particular note on this point, employers in the Fourth Circuit (which covers Maryland, Virginia, West Virginia, and the Carolinas) should be aware that they are already subject to an extremely broad standard for determining joint employer status under the FLSA that well exceeds the parameters of the new Final Rule. In January 2015, the U.S. Court of Appeals for the Fourth Circuit announced a new and expansive joint employment status test in Salinas v. Commercial Interiors, Inc., under which, in our opinion, nearly all contractor or staffing agency relationships would be found to constitute joint employment. Unless and until the Fourth Circuit revisits this standard, relying on the new Final Rule in contractor or staffing agency relationships poses a significant risk.
Moreover, the standards for determining employee status differ under various federal laws, such as the National Labor Relations Act or the federal anti-discrimination laws. (The National Labor Relations Board is poised to issue its Final Rule on joint employer status as well). What this means is that employers may be subject to multiple standards for determining employee status, and should consult with counsel when faced with making such determinations.
Additional Resources. In connection with the Final Rule, the DOL also issued a Fact Sheet and Frequently Asked Questions that reiterate the detailed examples of when joint employer status will and will not be found, which we have summarized above.