DOL Issues Final Rule on Joint Employer Status Under Fair Labor Standards Act

On January 16, 2020, the Department of Labor (DOL) formally published its much-anticipated final rule revising DOL regulations that address joint-employer status under the Fair Labor Standards Act (FLSA). The Final Rule, as published in the Federal Register, can be found here.

The FLSA requires covered employers to comply with certain minimum wage and overtime requirements. Under the FLSA, in certain circumstances an employee can have two or more employers who are jointly and severally liable for wages due the employee. The DOL’s recently published rule provides guidance concerning two potential joint employer scenarios. First, the final rule adopts a four-factor balancing test for determining joint employer status in the scenario where one employer employs an individual and a second employer benefits from the employee’s work. Second, the rule provides guidance regarding joint employer status where an employee works separate hours in the same workweek for multiple employers.

The DOL’s Four-Factor Balancing Test

The final rule provides that a person or entity will be considered a joint employer if the person or entity “is acting directly or indirectly in the interest of an employer in relation to the employee.” To determine whether a person or entity meets the joint employer requirement, the DOL will apply a four-factor balancing test derived from the decision of the U.S. Court of Appeals for the Ninth Circuit in Bonnette v. California Health & Welface Agency, 704 F.2d. (9th Cir. 1983).

The DOL’s balancing test examines whether the potential joint employer:

1. Hires or fires the employee;
2. Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
3. Determines the employee’s rate and method of payment; and
4. Maintains the employee’s employment records.

The rule stresses that no single factor is dispositive in determining joint employer status, and the weight given each factor will vary based on the circumstances of each case. The rule is clear, however, that neither the maintenance of employment records nor standard contractual language preserving the right to act will, in and of themselves, demonstrate joint employer status.

Further, the final rule provides that additional factors may be considered in the joint employer analysis, but only if they are indicia of whether the potential joint employer exercises significant control over the terms and conditions of the employee’s work.

Actual Exercise of Control is Required

The final rule clarifies that to be a joint employer under the FLSA, a second employer must actually exercise—directly or indirectly—one or more of the four control factors identified above. Thus, the purported joint-employer’s ability, power, or reserved right to act in relation to the employee, alone, does not demonstrate joint employer status without some actual exercise of control.

The rule explains that a potential joint employer exercises “indirect control” by issuing mandatory directions to another employer that directly controls the employee. On the other hand, “the direct employer’s voluntary decision to grant the potential joint employer’s request, recommendation, or suggestion does not constitute indirect control that may demonstrate joint employer status.” For example, as stated in the final rule, “a restaurant could request lower fees from its cleaning contractor, which if agreed to, could impact the wages of the cleaning contractor’s employees. But this request would not constitute an exercise of indirect control over the employee’s rate of payment because the cleaning service has discretion to lower its employees’ wages or not.”

Economic Dependence is Not Relevant

The final rule stresses that an employee’s economic dependence on the potential joint employer is not relevant for determining the potential joint employer’s liability under the Act. Therefore, economic-dependence-based factors, such as (1) whether the employee is in a specialty job or a one requiring special skill, initiative, judgment, or foresight; (2) whether the employee has the opportunity for profit or loss based on his or her managerial skill; (3) whether the employee invests in equipment or materials required for work or the employment of helpers; and (4) the number of contractual relationships, other than with the employer, that the potential joint employer has entered into to receive similar services, are not relevant.

Some Business Models and Practices That are Neutral

The final rule identifies a number of business models, business practices, and contractual agreements that are considered to be neutral. That is, their existence does not make joint employer status more or less likely under the Act. These include:

1. Use of the franchise model;
2. Use of brand and supply agreements;
3. Contractual provisions intended to encourage legal compliance or promote desired social effects, such as provisions requiring an employer to institute workplace safety practices, sexual harassment policies, wage floors, morality clauses, or other provisions encouraging the employer’s compliance with their legal obligations;
4. Business practices where a potential joint employer simply provides or shares resources or benefits with an employer, such as handbooks and business forms;
5. Allowing an employer to operate a facility on its premises;
6. Offering an association health or retirement plan to the employer or participating in such a plan with the employer; or
7. Jointly participating with an employer in an apprenticeship program.

Test For Determining Joint-Employer Status When Employee Works Separate Jobs and Hours for Multiple Employers

The final rule notes that a joint employer relationship may also exist where an employee performs distinctly different jobs for multiple employers and “the employers are sufficiently associated with respect to the employment of the employee.” Employer’s will generally be “sufficiently associated” if there is an arrangement between them 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, by reason of the fact that one employer controls or is controlled by, or is under common control with the other employer.

Joint employer liability under these circumstances will depend “on all of the facts and circumstances” but “certain business relationships . . . which have little to do with the employment of specific workers—such as sharing a vendor or being franchisees of the same franchisor— are alone insufficient to establish that two employers are sufficiently associated to be joint employers.”

Next Steps

The final rule, which will go into effect on March 16, 2020, has narrowed the scope of joint employment, thus, easing some of the risk of joint employer liability. However, it is important for employers to note that the final rule applies only to joint employer status under the FLSA. In fact, the National Labor Relations Board and the Equal Employment Opportunity Commission are expected to issue their own regulations and standards on joint employment in the coming months. Additionally, a number of states’ laws impose different or more-stringent standards, thus, it is important for employers to assess compliance under all applicable state and federal laws.

Please do not hesitate to contact any of our attorneys if you if you have any questions about the Final Rule, the joint employer analysis, or any other wage and hour issue.