Legal Updates

DOL's New Rule On Joint Employment Is Welcome News For Employers

For the first time in over 60 years, the United States Department of Labor (“DOL”) has substantially revised its regulations regarding the often-litigated “joint employer” issue under the Fair Labor Standards Act (“FLSA”).

This past January, the DOL published a final rule regarding joint employment, to take effect in mid-March. This topic is significant for employers and employees alike, as businesses that are found to be joint employers can be held liable for FLSA violations by one another – such as a failure to pay overtime compensation.

The final rule introduces a four-factor balancing test for determining joint employer status where one employer benefits from work performed for another employer. It also describes the circumstances under which joint employer status is established when employees work separate sets of hours for different employers in the same workweek. Finally, the new rule identifies certain types of business relationships that, in the DOL’s view, do not, in and of themselves, establish joint employment.

While the DOL’s new rule is not formally binding, it is likely to carry persuasive power with courts, and thus augurs well for businesses faced with joint-employer claims.

Background

The FLSA requires, among other things, that employers pay employees at no less than the federal minimum wage rate (currently $7.25 per hour, though many states and municipalities have higher minimum wage rates), and that non-exempt employees receive at least one-and-one-half times their regular pay rate for all hours worked over 40 in a workweek.

The DOL and courts have long recognized that an employee may simultaneously have two or more employers for purposes of the FLSA. If those employers have a sufficiently close association with one another, they may be deemed joint employers and held jointly and severally liable for unpaid wages.

On this issue, the DOL first published an interpretive regulation in 1958, codified at 29 CFR, part 791, which took the position that joint-employer status depended on whether multiple employers were not “completely dissociated” or “acting entirely independent of each other.”

Under the Obama Administration, the DOL attempted to broaden the scope of joint employment through informal guidance. In 2014 and 2016, the DOL issued Administrator’s Interpretations stating that joint employment “should be defined expansively” and “as broad[ly] as possible” under the FLSA. Following President Trump’s election, the DOL rescinded those Interpretations in 2017.

Subsequently, in April 2019, the DOL issued a Notice of Proposed Rulemaking (“NPRM”), focusing, in particular, on the most common joint-employer scenario under the FLSA – where an employer engages an employee to perform work that simultaneously benefits a second employer. The DOL’s final rule adopts the NRPM virtually in its entirety.

Four-Factor Balancing Test

As to a scenario in which a second employer benefits from an employee’s work for another employer, the DOL’s new rule sets forth a four-part test for determining joint-employer status under the FLSA. Although no one factor is determinative, the four-factor test assesses the extent to which the second employer:

* Hires or fires the employee;
* Supervises and controls the employee’s work schedule or conditions of employment;
* Determines the employee’s rate and method of payment; and/or
* Maintains the employee’s employment records.

In the final rule, the DOL emphasizes that the appropriate weight given to each factor will vary depending on the circumstances. The DOL states, however, that maintenance of employment records, alone, is not sufficient establish joint employer status.

In addition to those four criteria, the final rule provides that other factors may be considered, “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.”

Regarding a scenario in which an employee works for multiple employers in the same workweek, the final rule states that joint employment can be established where the multiple employers are “sufficiently associated with respect to the employment of the employee.” The DOL found that applying the four-factor test to this alternative scenario “would be inconsistent with the longstanding approach to focus on the relationship and association between the two potential joint employers.”

Irrelevant Factors And Business Models

In promulgating the new rule, the DOL explicitly declined to consider a worker’s economic dependence upon an employer as a consideration, stating that “[c]onsidering such economic factors as part of a joint employer analysis would focus on the employee’s own status, would almost always suggest economic dependence when the worker is already employed for the work, and would not be helpful in determining whether the other person is also the employee’s ‘employer’ (i.e., a joint employer) for the work.”

Accordingly, in the DOL’s view, “factors that assess the employee’s economic dependence are not relevant to determine whether the worker has a joint employer.” Such immaterial factors include the following:

* Whether the employee is in a specialty job or a job that otherwise requires special skill, initiative, judgment or foresight;
* Whether the employee has the opportunity for profit or loss based on his or her managerial skill;
* Whether 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 states that while courts have used these factors for determining whether a worker is an employee or independent contractor, “they are not relevant for determining whether additional persons are jointly liable under the [FLSA] to a worker whose classification as an employee has already been established.”

Finally, the new rule addresses a number of other business practices and contractual arrangements that, in the DOL’s view, do not suggest that separate businesses should be deemed joint employers under the FLSA. These include:

* Operating as a franchisor, entering into a brand-and-supply agreement, or using a similar business model;
* Requiring an employer to comply with certain legal obligations, institute sexual harassment policies or establish workplace safety practices;
* Requiring an employer to implement quality control standards to ensure the consistent quality of the work product, brand or business reputation;
* Providing an employer with a sample employee handbook or other forms; and
* Allowing another employer to operate a business on the employer’s premises.

Conclusion

While it remains to be seen how courts will view the DOL’s positions on these issues, the final rule is a favorable development for employers, who now have additional ammunition with which to defend themselves against joint-employer claims.

If you have questions about the DOL’s final rule on joint employment or any other wage-and-hour issue, please feel free to reach out to one of our experienced employment attorneys.