LawFlash

Joint Employer Standard: DOL Extends Comment Period on Proposed Revisions

May 17, 2019

DOL’s proposed interpretation of the joint employer standard in a recently released notice of proposed rulemaking would revert to a traditional control standard and use a new “four-factor balancing test” for determining joint employer status.

The US Department of Labor (DOL) recently issued a notice of proposed rulemaking (NPRM) aimed at updating and clarifying the standard used to determine whether an employer may be deemed a joint employer of another company’s employees pursuant to the Fair Labor Standards Act (FLSA). Under the FLSA, joint employers are jointly and severally liable for all wages due an employee for all hours worked for either entity. In the NPRM, the DOL proposes using a new “four-factor balancing test” to determine whether an entity is a joint employer. The test examines whether the purported joint employer does the following with respect to the employee:

  1. Hires or fires
  2. Supervises and controls the work schedule or conditions of employment
  3. Determines rate of pay and method of payment
  4. Maintains employment records

The DOL would limit the test to “actions taken with respect to the employee’s terms and conditions of employment, rather than the theoretical ability” to take such actions. The NPRM also makes clear 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.

Interested parties now have until June 25, 2019 to submit comments to the DOL regarding this NPRM.

Background

Companies that are “joint employers” under the FLSA are responsible for any employment-related liability arising out of an employment matter, including overtime, minimum wages, meal and rest premiums, and expense reimbursement.[1] Under the current DOL joint employer rule, promulgated in 1958, multiple employers can be joint employers of an employee if employment by one employer is not “completely disassociated from employment by the other employer.”[2] In the scenario where the employee performs work that “simultaneously benefits two or more employers,” a joint employment relationship exists where (1) there is an arrangement between the employers to share the employee’s services, (2) one employer is acting directly or indirectly in the interest of the other employer, or (3) the employers are “not completely disassociated” with respect to the employment of the employee.[3]

This standard, combined with court decisions requiring the application of multifactor tests, and a now-withdrawn 2016 Wage and Hour Division (WHD) Administrator’s Interpretation, have caused confusion for employers. DOL’s NPRM seeks to clarify the standard.

The New Four-Factor Test

DOL’s proposed four-factor balancing test is derived from Bonnette v. California Health & Welfare Agency.[4] The DOL’s proposed test modifies the Bonnette test, however, in one important respect: Where the Bonnette test looked at a person’s theoretical or contractual power to act with respect to the employee’s terms and conditions of employment, DOL’s proposed test considers only actions taken in this regard. The proposal does not entirely abandon consideration of other factors but explains that they are only relevant if they are indicia that the potential employer is exercising significant control over the employee’s terms and conditions of work, or otherwise acting directly or indirectly in the interest of the employer in relation to the employee.

The NPRM also rejects the application of any factors that assess economic dependence, because that is the test for employee/independent contractor status, not joint employer status. In this regard, DOL specifically identifies three economic dependence factors that are not relevant to determining joint employer status—the employee has a specialty skill, opportunity for profit or loss, and investment in equipment or materials.

The NPRM also clarifies that no particular “business model” would make joint employer liability more likely. For example, DOL states that operating as a franchisor does not make joint employer status more likely under the FLSA. Similarly, the NPRM clarifies that the following contractual arrangements or business practices do not make joint employer status more or less likely:

  • Contractual agreements with the employer requiring the employer to, for example, set a wage floor, institute sexual harassment policies, establish workplace safety practices, require morality clauses, or adopt similar generalized business practices.

     

  • Providing a sample employee handbook, or other forms, to the employer; allowing the employer to operate a business on its premises; offering an association health plan or association retirement plan to the employer or participating in such a plan with the employer; or jointly participating in an apprenticeship program with the employer.

The DOL asks for comments on a set of illustrative examples demonstrating how the proposal would apply in certain scenarios, including with respect to franchise arrangements, store-within-a-store arrangements, and staffing agency situations. Below are two of the examples and how the proposed rule would handle joint employer status in each:

Example 1

An individual works 30 hours per week at one restaurant and 15 hours a week in a different restaurant, and both restaurants are affiliated with the same nationwide franchise. If these establishments are locally owned and managed by different franchisees who do not coordinate in any way with respect to the employee, the DOL would find that the restaurant establishments are not joint employers.

Example 2

A country club contracts with a landscaper to maintain its golf course, and the contract does not give the club the authority to hire, fire, or supervise the landscaping company employees. In practice, however, the club official oversees the landscapers’ work by sporadically assigning them tasks, instructions, and keeping intermittent records of their work, and the landscaping company agrees to terminate a worker for failing to follow a club official’s instructions. In this scenario, the proposed interpretation would deem that the country club and landscaper are joint employers.

Related Developments—Classification of Gig Workers

DOL’s joint employment NPRM dovetails with their April 29, 2019 Opinion Letter addressing whether a service provider for a virtual marketplace company (VMC) is an employee of the company under the FLSA, or an independent contractor. In FLSA 2019-6, DOL applied the “economic realities” test to find that the workers are independent contractors, not employees. Under the economic realities test, DOL considers the following:

  • Nature and degree of the potential employer’s control
  • Permanency of the worker’s relationship with the potential employer
  • Amount of the worker’s investment in facilities, equipment, or helpers
  • Amount of skill, initiative, judgment, or foresight required for the worker’s services
  • The worker’s opportunities for profit or loss
  • Extent of integration of the worker’s services into the potential employer’s business

The economic realities test has not changed, but the VMCs do not fit into the “traditional employment paradigm covered by the Act,” and thus DOL offered some new perspectives on the application of the test to the sharing economy that provide helpful guidance to other business models. First, DOL weighed quite heavily the fact that the workers can work for other businesses—even competitors—during and after the work for this VMC and that the workers had almost unlimited flexibility in choosing whether to work, for how long, for whom, and how. DOL also emphasized managerial discretion and independence, and the fact that the VMC did not train the workers. DOL also opined that quality control and compliance monitoring (including the right to remove service providers) is neutral and not indicative of control.

Conclusion

DOL acknowledges that this NPRM on joint employer status is an “interpretive” rule, not a legislative rule, which means a reviewing court will apply a lower standard of deference if a final rule is challenged. Regardless of how much deference a reviewing court would give to a final rule, an interpretive rule definitely sets forth the DOL’s policy for overtime and minimum wage enforcement, which provides certainty to businesses subject to a DOL audit or investigation. It should also be noted that the proposed rule addresses joint employment liability under federal law, specifically the FLSA. It does not address joint employer status under other federal laws, notably the National Labor Relations Act, or state law, which, like independent contractor tests, can vary dramatically.

Like DOL’s recent overtime and regular rate activity, the joint employer proposal has only cleared the first major hurdle of the rulemaking process. The comment period has been extended and will now close on June 25, 2019. Given the fact that the WHD has three major rules to finalize simultaneously, plus a tip proposal and a hazardous occupation order rule still in the pipeline, it seems unlikely that DOL will finalize this rule before the end of 2019. 

In the meantime, companies should maintain due diligence over the use of contingent workers by business lines and potential business partners to ensure they are not exercising direct or even indirect control. Vendors, franchisees, and other business partners should determine how, when, and where work will be performed. Companies should take steps to confirm who controls hiring, training, and evaluations, and ensure that their vendors and workers are free to work for other firms.

The NPRM and Opinion Letter signify DOL’s more business-friendly approach to defining employer status in the joint employer and independent contractor contexts, at least for DOL enforcement purposes. It remains to be seen whether the courts will defer to either interpretation.

Contacts

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:

Chicago 
Sari M. Alamuddin
Stephanie Sweitzer

Houston
Stefanie Moll

Los Angeles 
John S. Battenfeld
Max Fischer
Douglas Hart
Jennifer Zargarof

Miami 
Anne Marie Estevez 

New York 

Leni Battaglia
Christopher A. Parlo 
Samuel S. Shaulson

Orange County 
Carrie A. Gonell 
Daryl S. Landy 
Barbara J. Miller

Philadelphia 

Michael J. Puma

Pittsburgh 

Christopher K. Ramsey

Princeton 

Thomas A. Linthorst 
Richard G. Rosenblatt

San Francisco 

Robert Jon Hendricks 
Eric Meckley

Silicon Valley 

Melinda S. Riechert
Michael D. Schlemmer

Washington, DC 

Lincoln O. Bisbee
Russell R. Bruch 
Susan Harthill


[1] 29 U.S.C. § 7(e).

[2] 29 C.F.R. § 791.2(a)

[3] 29 C.F.R. § 791.2(b).

[4] 704 F.2d 1465 (9th Cir. 1983)