On January 20, 2016, the Wage and Hour Division (WHD) of the U.S. Department of Labor (DOL) released an “Administrator’s Interpretation” and related FAQs articulating the DOL’s new analytical framework for the existing joint employment legal test. The DOL plans to use the new Interpretation (“AI 2016-1”) to increase aggressive joint employment enforcement against the growing number of businesses in today’s new economy across all industries that rely on contract service providers to perform functions integral to their own business.
AI 2016-1 specifically relates to what the DOL sees as the relevant factors for determining when a company is a joint employer for purposes of the federal wage law (and the federal migrant and seasonal worker’s law although this Alert does not discuss the latter). The new guidance is consistent with the aggressive joint employer positions taken by the NLRB and other branches of the DOL including OSHA. The DOL’s goal is to hold companies that benefit from work performed by another firm’s employees equally responsible for the payroll firm’s employment and labor law violations. AI 2016-1 sends a strong warning that joint employment enforcement is going to get a lot tougher for many unsuspecting companies across all industries and will target well-established business practices.
The Interpretation does not articulate a new legal test; rather it announces a new analytical framework for evaluating joint employment. It divides joint employment arrangements into “horizontal” and “vertical” joint employment and lists various non-exhaustive factors that the DOL considers relevant to each situation:
- Horizontal joint employment is where Company A and Company B are in some way related to one another and share an employee, but are distinct economic units. Example: a restaurant manager works at two different restaurants, one owned by Company A and the other owned by Company B. If the worker cumulatively works more than 40 hours/week, are Company A and Company B each liable for the entire overtime pay because the entities are so related that the manger’s employment is considered a single employment?
- Do the potential joint employers (Company A and Company B) have common owners? (Yes is a factor favoring joint employment)
- Do the potential joint employers have any overlapping officers, directors, executives, or managers? (Yes is a factor favoring joint employment)
- Do the potential joint employers share control over operations (e.g., hiring, firing, payroll, advertising, overhead costs)? (Yes is a factor favoring joint employment)
- Are the potential joint employers’ operations inter-mingled (e.g., centralized employee scheduling, accounting, and other administrative functions)? (Yes is a factor favoring joint employment)
- Does one potential joint employer supervise the work of the other? (Yes is a factor favoring joint employment)
- Do the potential joint employers share supervisory authority for the employee? (Yes is a factor favoring joint employment)
- Do the potential joint employers treat shared employees as a pool of employees available to both of them? (Yes is a factor favoring joint employment)
- Do the potential joint employers share clients or customers? (Yes is a factor favoring joint employment)
- Are there any agreements between the potential joint employers? (Yes is a factor favoring joint employment)
- Vertical joint employment is where Company A and Company B are not related and do not both hire the same employee, but agree that Company B’s employee will perform services benefitting Company A. Based on the “economic realities” of the arrangement between Company A and Company B, the employee of Company B (which DOL calls the “intermediary employer”) is considered “economically dependent” on Company A and, therefore, jointly employed by Company A (the “potential joint employer”). Example: Company B assigns its employees to perform housekeeping services at Company A’s hotel: is Company A the joint employer of the housekeeping staff?
In analyzing if a vertical joint employment relationship exists, the first question the DOL will ask is whether the intermediary employer (Company B) itself is an employee of the potential joint employer (Company A). If yes, then all employees of Company B are considered employees of Company A too and there is no need for further analysis. But when Company B, the intermediary employer, cannot be classified as Company A’s employee based on the DOL’s criteria, then the vertical joint employment analysis examines the “economic realities” of the working relationship between Company B’s employees and the potential joint employer (Company A) by considering seven relevant factors:
- Does the putative joint employer (Company A) direct, control or supervise the employees’ work beyond reasonable oversight for Company B’s performance of its contract with Company A? (Yes is a factor favoring joint employment)
- Does Company A indirectly influence Company B’s employment decisions (a lot like the NLRB test)? (Yes is a factor favoring joint employment)
- How long have Company B’s employees been performing services important to Company A’s business? (A longer relationship favors joint employment)
- Is the nature of Company B’s employees’ work rote, repetitive and unskilled? (Yes is a factor favoring joint employment)
- Is the work of Company B’s employees integral to Company A’s business? (Yes is a factor favoring joint employment)
- Do Company B’s employees work on premises that Company A owns or leases? (Yes is a factor favoring joint employment)
- Does Company A provide equipment, tools, or materials to Company B that its employees need to perform the contracted work? (Yes is a factor favoring joint employment)
While the DOL says its legal standard of joint employment differs from the NLRB’s new focus on “indirect control,” AI 2016-1’s emphasis on economic dependence, as opposed to control, in determining if a joint employment relationship exists, particularly in the context of potential vertical joint employment, is an equally amorphous and arguably broader legal test than the NLRB test.
AI 2016-1 says nothing about trademark licensing arrangements, although these arrangements will be analyzed as potential vertical joint employment situations. The DOL claims that AI 2016-1 is not directed expressly at franchising, perhaps in response to the franchise industry’s barrage of criticism for expanded joint employer litigation against franchisors, saying: “Indeed, the existence of a franchise relationship, in and of itself, does not create joint employment.” While the comment hardly exempts franchisors, it acknowledges that there is nothing inherently infirm about the franchise method of doing business, or, more broadly, with trademark licensing, when it comes to joint employment legal enforcement.
The significance of finding joint employment is that it exposes a company to expansive liability for unpaid wages, overtime pay, and penalties for workers who are not on their payroll. The risk to a company of being found to be a joint employer of its contractor’s employees is that each joint employer is jointly and independently responsible for the entire wage liability as the law does not apportion liability among joint employers.
Courts are not bound to follow an Administrator’s Interpretation and it is too early to tell if the DOL’s latest guidance, AI 2016-1, will change judicial enforcement. But it will encourage plaintiffs’ lawyers and their clients to bring joint employer claims under the federal wage law. Consequently, businesses in all industries should examine any risky practices especially under the new analytical framework that the DOL will utilize and consider if there are other ways to get work done with lower joint employer risks. We are available to discuss preventative solutions specific to your business that you may wish to consider.