On April 1, 2019, the U.S. Department of Labor (DOL) gave notice of a proposed update to the regulations defining when two or more legally separate business entities may be considered “joint employers” for determining liability under the Fair Labor Standards Act (FLSA). In other words, the agency has proposed a rule to clarify when related businesses—such as franchisors and franchisees, staffing companies and their clients, and contractors and subcontractors—may be jointly liable for overtime and minimum wage violations. The revised regulations, if enacted, should bring much-needed clarity to the joint employment issue and should be a welcome development for employers.
Current rule
The DOL came up with its current joint employer regulation way back in 1958, and it hasn’t been significantly revised since. The regulation provides that two companies may be considered joint employers if they do not act “entirely independently of each other” and are not “completely disassociated” with respect to a particular employee’s employment. It also provides that if an employee works for two or more employers during a single workweek or performs work simultaneously benefiting two or more employers, they will be considered “joint employers” if:
- They have an arrangement to share the employee’s services;
- One employer is acting directly or indirectly in the other employer’s interest in relation to the employee; or
- They are not completely disassociated with respect to the employee and may be deemed to share control of her directly or indirectly.
As you can imagine, courts have struggled to provide clear and consistent guidance to businesses on the joint employment issue. It has gotten more difficult over time as the workplace has modernized and employment relationships that didn’t exist in 1958—such as temporary staffing relationships—are now commonplace.
Many courts across the country have issued their own unique, multifactor tests on the joint employer issue, which has created inconsistency. What may qualify as a joint employment relationship in one state may not be in another. To make matters worse, in 2014 and 2016, the DOL issued guidance documents calling for an even more expansive application of the joint employment doctrine. The guidance documents instructed employers to look beyond the degree of actual control an employer had over the employee and to consider whether the individual was economically independent. The result has been a confusing mess of different rules making it very difficult for companies to determine if they are in compliance with the law.
Proposed rule
The proposed rule should bring much-needed clarity to the joint employer issue by specifying the factors a court should consider in determining whether two separate business entities should be joint employers for FLSA purposes. The new rule provides a four-factor test for joint employer liability. Courts should consider whether the potential joint employer actually exercises the power to:
- Hire or fire the employee;
- Supervise and control her work schedule or employment conditions;
- Determine her rate and method of payment; and
- Maintain her employment records.
The proposed rule also makes clear what a court should not consider in analyzing the joint employer issue. For example, an employee’s economic dependence on the employer is irrelevant. This is important because it’s relatively common for a temporary employee to be assigned to one client, possibly over the course of several months or years. Under the old rule, such an employee would be economically dependent on the client, potentially subjecting the client to joint employer liability.
Similarly, the proposed regulation states an employer’s control over the terms and conditions of employment is relevant only if it is actually exercised. An employer’s theoretical ability to control the employee isn’t relevant. Thus, the mere inclusion of a potential joint employer’s right to control in a franchise or staffing agreement wouldn’t affect the joint employer analysis unless such control was actually exercised.
The proposed rule also makes clear that the use of certain business models or practices doesn’t lead to joint employment status. In other words, the simple fact an employer uses temporary staffing or is a franchise owner doesn’t automatically trigger a joint employment relationship. Similarly, the use of certain business practices, such as requiring another employer to institute safe work practices or sexual harassment policies, will not be relevant to the joint employer determination.
Key takeaways
The proposed rule is subject to a 60-day comment period, at which time it may be modified and/or adopted. If it is adopted, it should help bring clarity to the joint employment issue, especially for employers in the business models addressed by the proposed rule—franchisee/franchisors, temporary staffing agencies and their clients, and general/subcontractors—as well as larger employers subject to the multitude of tests currently applied in different jurisdictions throughout the country.
Do keep in mind, however, that even if the rule is passed, the joint employment issue will still require careful consideration. Although courts generally give deference to the DOL’s rules and regulations, they aren’t required to do so. Thus, it’s possible for some courts to reject the agency’s approach and rely on their own tests for joint employer status.
Also, each individual state and other federal agencies—such as the Equal Employment Opportunity Commission (EEOC) or the National Labor Relations Board (NLRB)—have their own joint employer tests. Thus, even if the DOL clarifies its standard, it won’t serve as a “one-size-fits-all” standard applicable across the board to any other context. You will still have to analyze each state law individually and analyze the applicable standard under each law at issue.
Although the DOL’s proposed rule is a much-needed step in the right direction, the joint employer issue will continue to be a difficult one for many employers. Savvy employers will continue to need legal counsel when entering into any business relationship where there’s a potential for joint employer liability.
THIS ARTICLE FIRST APPEARED IN HRLAWS.COM'S TENNESSEE EMPLOYMENT LAW LETTER
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