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DOL Eyes Narrower Joint Employer Test

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Volume 42 | Issue 53

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The DOL has released its much anticipated proposal to update and clarify its interpretation of joint employer status under the Fair Labor Standards Act. The proposed rule would establish a four-factor test to determine whether an entity is a joint employer in common business scenarios. Written comments may be submitted until June 25.

Background

The federal Fair Labor Standards Act (FLSA) requires covered employers to pay their nonexempt employees at least the federal minimum wage for all hours worked and overtime for all hours worked in excess of 40 in any workweek. While the FLSA does not use or define the term “joint employer,” it does contemplate an individual having an employment relationship with more than one employer.

Under the FLSA, entities that are determined to be joint employers are jointly and severally liable for the same employee’s wages, including overtime. Whether multiple employers have separate and distinct — or shared — responsibilities under the FLSA depends on the extent to which they act independently of one another with respect to the employment of the same employee.

Current DOL joint employer regulations, which have not been meaningfully revised in 60 years, address two scenarios — where the employee (1) works one set of hours for an employer that simultaneously benefits another entity, or (2) works separate sets of hours for multiple employers in the same workweek. With respect to the first scenario, the regulations provide that multiple entities may be joint employers of an employee if they are “not completely disassociated” with respect to that worker’s employment. However, the regulations do not adequately explain what that means — particularly with respect to business models such as franchise arrangements, portfolio member companies, and businesses that rely on staffing agencies.

Proposed regulations

On April 1, the DOL issued proposed regulations to revise and clarify who is responsible for satisfying the FLSA’s minimum wage and overtime requirements in joint employer arrangements. The proposal would replace the current “not completely disassociated” standard with a four-factor balancing test for situations where an employee works one set of hours for an employer that simultaneously benefits another entity, such as in subcontractor/general contractor scenarios.

Where an employee works separate sets of hours for multiple employers in the same workweek, the proposal includes only non-substantive changes. If, however, the employers are joint employers, all hours worked by the employee would be aggregated for purposes of complying with the FLSA’s overtime pay requirement.

The multi-factor test

The four-factor test for determining joint employer status under the FLSA would consider whether the potential joint employer actually exercises the power to:

  • Hire or fire the employee
  • Supervise and control the employee’s work schedules or conditions of employment
  • Determine the employee’s rate and method of payment, and
  • Maintain the employee’s employment records

Under this test, no one factor would be dispositive in determining joint employer status. Rather, the weight for each factor will vary based on the particular circumstances.

NLRB’s proposed joint employer standard

On September 14, 2018, the National Labor Relations Board (NLRB) proposed a regulation establishing the standard for determining joint employment under the National Labor Relations Act. The new rule would narrow the board’s definition of joint employment for collective bargaining, unfair labor practices, and other purposes.

Grounded on direct and immediate control over another entity’s workers, the proposed rule would find joint employment “only if the two employers share or codetermine the employees’ essential terms and conditions of employment, such as hiring, firing, discipline, supervision, and direction.” (See our September 14, 2018 FYI Alert.)

 

Buck comment. Like the NLRB, the DOL is proposing to limit joint employer status to those entities that actually — rather than theoretically could — control the terms and conditions of another entity’s workers. Labor Secretary Alexander Acosta previously rescinded Obama-era guidance that took an expansive view of joint employment. (See our June 8, 2017 FYI Alert.)

Additional factors. Additional factors may be considered to determine joint employer status under the FLSA, but only if they indicate whether the potential joint employer is:

  • Exercising significant control over the employee’s terms and conditions or
  • Acting directly or indirectly in the employer’s interest in relation to the employee

Notably, the proposal explains that the ability, power, or reserved contractual right to control an employee’s terms and conditions of employment would not be relevant in determining joint employer status. The DOL further explains that the employee’s economic dependence on the potential joint employer does not determine that employer’s FLSA liability, and it provides examples of economic dependence factors that would not be relevant in the joint employer analysis. These include whether the employee:

  • Occupies a specialty job or another job requiring special skill, initiative, judgment, or foresight
  • Has a profit or loss opportunity based on managerial skill
  • Invests in equipment or materials required for work or to employ helpers

Although those same factors are often used to determine whether a worker is an employee or an independent contractor, that analysis is separate from the question of who is the employer. Only the definition of “employer” in FLSA section 3(d) — not the definition of “employee” in section 3(e)(1) or 3(g) — provide the statutory basis for determining joint employer status.

While the proposed rule provides that indirect action in relation to an employee may establish joint employer status, the clarification is tied to the statutory definition of “employer” as including “any person acting directly or indirectly in the interest of an employer in relation to an employee.”

Importantly, in addition to identifying factors that are — or are not — relevant to the joint employer analysis, the proposal also clarifies that certain factors do not make joint employment status more or less likely, including:

  • An entity’s business model, including, for example, franchise arrangements
  • Certain business practices, such as providing a sample employee handbook to a franchisee, allowing an employer to operate a facility on one’s premises, jointly participating in an apprenticeship program, offering an association or retirement plan to — or participating in the plan with — the employer
  • Certain business agreements, such as requiring an employer to institute workplace safety measures, wage floors, or sexual harassment policies

Clarifying examples

To further help clarify joint employer status, the proposal also includes a set of nine illustrative examples of how the proposed regulations would apply for determining joint employment in common scenarios.

Further information on the proposed joint employer regulations is available on the DOL’s website, including Frequently Asked Questions and a Fact Sheet.

In closing

The DOL’s proposed rule is intended to reduce uncertainty over joint employer status and clarify employer obligations in common scenarios. If adopted, it would narrow joint employment liability for minimum wage and overtime violations. Written comments may be submitted until June 25, 2019.

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