Seyfarth Synopsis: On January 12, 2020, the U.S. Department of Labor announced its Final Rule clarifying the issue of joint employment under the Fair Labor Standards Act. The Final Rule adopts a four-factor balancing test and rejects various factors that have fueled recent litigation, e.g., a worker’s economic dependence on a potential joint employer, the potential employer’s business model, and its unexercised power over the worker.
Despite being the subject of intense debate and administrative focus, the DOL’s joint employment interpretation has not been subject to formal, substantive change in the 60 years since it was issued. In January 2016, however, then-WHD Administrator David Weil issued an Administrator’s Interpretation (“AI”) regarding joint employment under the FLSA. In the AI, Dr. Weil published a view that joint employment “should be defined expansively.” The AI focuses the inquiry, in part, on a worker’s economic dependence on the potential joint employer. This standard was intended to be “as broad as possible.” In June 2017, then-DOL Secretary Alexander Acosta withdrew the AI, which had grown to be seen by the business community as an over-expansion of the joint employment standard.
Four Factor Test
In the Final Rule, DOL specifies that, when an employee performs work for the employer that simultaneously benefits another person, that person will be considered a joint employer when that person is acting directly or indirectly in the interest of the employer in relation to the employee.
DOL adopts the four-factor test from its proposal. Thus, where an employee performs work for the employer that simultaneously benefits another individual or entity, the determination of whether the potential joint employer is directly or indirectly controlling the employee, looks to whether the potential 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.
Actual control is necessary to establish joint employment. Standard contractual language reserving a right to act, for example, is alone insufficient for demonstrating joint employer status.
The Final Rule also specifically notes that an employee’s “economic dependence” on a potential joint employer does not determine whether it is a joint employer under the FLSA. In addition, the Final Rule sets forth several factors that do not make joint employer status more or less likely under the FLSA, including:
- 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.
As was the case with the proposal, the Final Rule provides several examples applying the Department’s guidance for determining FLSA joint employer status in a variety of different factual situations.
The Final Rule is expected to be effective on March 16, 2020.
When the Final Rule becomes effective, it will provide additional support to businesses claimed to be jointly and severally liable for unpaid wages alleged to be owed by workers who are not their own. The Final Rule, however, should not be viewed as reason for businesses generally to be less cautious in the measures taken to avoid joint employer responsibility. As a practical matter, for instance, the provision of handbooks, policies, and other materials to another employer’s employees will create less risk of imputing pay responsibilities beyond the direct employer; but additional safeguards such as disclaimers making clear that the provision of those materials does not create an employment relationship will remain prudent.
All of this said, the Final Rule creates an opportune moment for businesses to examine their relationships with the workers from whom they receive beneficial services but whom they do not employ directly. The DOL’s new guidance provides a roadmap for further risk mitigating measures, though interpretations of joint employment under state wage and hour law need to be considered as well. Please contact Seyfarth Shaw’s Wage and Hour Litigation Practice Group for assistance.