The US Department of Labor has established a traditional control standard for determining joint employer status under the Fair Labor Standards Act.
The US Department of Labor (DOL) released the final version of its joint employer rule on January 12, updating the standard by which it determines whether an employer may be deemed a joint employer of another company’s employees pursuant to the Fair Labor Standards Act (FLSA). The final rule was published on January 16 and will become effective on March 16, 2020. Joint employment status is an important and frequently litigated issue because under the FLSA, joint employers are jointly and severally liable for all wages due to an employee for all hours worked for either entity. In the last few years there has been considerable debate among courts and even at the DOL on what the applicable test should be to determine joint employer status.
The new rule clarifies the DOL’s interpretation and adopts a slightly modified version of a four-factor balancing test set forth by the US Court of Appeals for the Ninth Circuit in Bonnette v. California Health & Welfare Agency, 704 F.2d 1465 (9th Cir. 1983). To determine whether an entity is a joint employer, DOL’s new test examines whether the purported joint employer
None of the four factors is dispositive and courts are to weigh all of the factors. For purposes of joint employer status, “employment records” means only those records that pertain to the first three factors. An example of such a record would be payroll records; however, the rule explicitly states that maintaining payroll records alone will not confer joint employment status.
The final rule also clarifies that the potential joint employer must actually exercise one or more of the four indicia of control to be jointly liable under the FLSA; it is insufficient that an entity has the ability, power, or reserved contractual right to exercise control. A reserved right to act in relation to an employee may, however, still be relevant. As the DOL has explained it, if a potential joint employer sets the wage rate for an employee and sets his or her weekly work schedule, and there was also evidence that this entity has authority to fire the employee at any time, then this reserved power to fire would be relevant, whereas standard contractual language reserving a right to act is alone insufficient for determining joint employer status—there still must be some actual exercise of control.
The DOL provided several additional examples to further clarify the rule. In one example, the DOL states that there is no joint employment where a large national company contracts with multiple other businesses in its supply chain and does not hire, fire, or supervise, or maintain the employment records of, the employees of its suppliers, even if the national company does require all suppliers to comply with a code of conduct that mandates a minimum hourly wage that is higher than the federal minimum wage, as well as a promise to comply with all applicable federal, state, and local laws. The DOL emphasizes that setting a wage floor, absent other indicia of control, is not sufficient to establish a joint employer relationship. The final rule also makes clear that operating as a franchisor, maintaining contractual agreements with the franchisee requiring quality control standards for branding or business reputation purposes, or using a similar business model does not make joint employer status more or less likely under the FLSA. Similarly, the monitoring and enforcement of such agreements do not confer joint employer status, so long as the company does not issue mandatory directions that directly control the employee.
Significantly, the final rule emphasizes that under the proposed standard, “whether the employee is economically dependent on the potential joint employer is not relevant for determining the potential joint employer’s liability under [the FLSA].” The rule then provides examples of factors that are not relevant because they assess the employee’s economic dependence, such as whether the employee is in a specialty job, has an opportunity for profit or loss based on managerial skill, or invests in equipment or materials.
It is worth noting that this rule is an “interpretive” rule, not a legislative rule, which means a reviewing court will apply a lower standard of deference if the final rule is challenged. It is also important to remember that this rule addresses joint employment under the FLSA only. It does not address joint employer status under other federal laws, such as the National Labor Relations Act, or state laws (including state and local wage and hour obligations), which, like independent contractor tests, can vary dramatically.
Companies should remain diligent over the use of contingent workers by business lines and potential business partners to ensure they are not exercising direct or even indirect control. Companies should make sure that vendors, franchisees, and other business partners determine rates, methods of pay, and how, when, and where work will be performed. Companies should also take steps to confirm who controls hiring, training, and evaluations.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Robert E. Sheeder
Anne Marie Estevez
Michael J. Puma
Christopher K. Ramsey