Non-Binding Administrative Interpretation Takes Position That JointEmployer Liability Under the Fair Labor Standards Act Should Be Based on the “Economic Realities” of the Working Relationship and Not the Traditional Degree of Control Test

SUMMARY

On January 20, 2016, the U.S. Department of Labor issued an Administrative Interpretation (the “Guidance”) setting forth the Department’s position on joint-employer status for purposes of liability under the Fair Labor Standards Act (the “FLSA”).1 The Guidance states that the analysis of whether a “vertical joint employment” relationship exists—in which case, the worker should be considered an employee of both the employer of record (e.g., a staffing agency, vendor or subcontractor) and the company that contracts with the employer to provide services—should turn on “the broader economic realities of the working relationship” between the worker and the company and not the company’s “control over the employee,” which is the traditional test applied by the Department and courts. The Guidance provides “seven economic realities factors” that it suggests courts use to assess joint employment claims under the FLSA. The Guidance, which follows a June 2015 proposal by the Department regarding changes in overtime regulations and a July 2015 Administrative Interpretation regarding misclassification under the FLSA, is part of the Department’s effort to expand the scope of FLSA coverage, as well as the current administration’s effort to use agency rules and interpretations to advance its agenda.

BACKGROUND

The FLSA defines an “employee” as a person “employed by an employer” and defines “to employ” as “to suffer or permit to work.” The Guidance continues the Department’s practice of reading the words “suffer or permit to work” extremely broadly, and maintains that it was Congress’s intent—by specifically using that phrase in the FLSA’s definition of “employ”—to expand the common law test for an employeremployee relationship from one that assessed the employer’s control over the worker to one that assesses the “economic realities” of the working relationship in order to cover the broadest possible universe of employment arrangements. (The Guidance explains that Congress adopted the “suffer or permit to work” standard from earlier state laws regulating child labor that were “designed to reach businesses that used middlemen to illegally hire and supervise children.”) And, consistent with its July 15, 2015 Administrative Interpretation, the Guidance takes the position that the main focus of the “economic realities” test should be whether the worker is “economically dependent” on the potential joint employer, in which case the potential joint employer would be considered an employer for purposes of FLSA compliance, liability and remediation as much as the intermediary employer.

THE GUIDANCE’S ANALYSIS

The Department states that the Guidance was prompted by a changing working environment in which “the possibility that a worker is jointly employed by two or more employers has become more common in recent years.” In the Department’s view, “businesses are varying organizational and staffing models by, for instance, sharing employees or using third-party management companies, independent contractors, staffing agencies or labor providers.” As a result, the Department believes that additional guidance concerning joint employment and FLSA compliance is needed.

The Guidance first distinguishes between vertical and horizontal joint employment relationships. “Horizontal joint employment exists where the employee has employment relationships with two or more employers and the employers are sufficiently associated or related with respect to the employee that they jointly employ the employee.” A horizontal joint employment analysis focuses on the relationship between the potential joint employers. By contrast, vertical joint employment analysis focuses on the “economic realities of the working relationship between the employee and the potential joint employer.” “Vertical joint employment exists where the employee has an employment relationship with one employer (typically a staffing agency, subcontractor, labor provider, or other intermediary employer) and the economic realities show that he or she is economically dependent on, and thus employed by, another entity involved in the work.” Although the Guidance suggests standards under which courts should analyze horizontal employment relationships, its most significant pronouncements concern vertical joint employment.

The Guidance takes the position that the Migrant and Seasonal Agricultural Worker Protection Act’s (the “MSPA”) joint employment regulations2 are relevant to FLSA enforcement, because the MSPA shares the FLSA’s definition of employment. The MSPA regulations provide seven factors by which to assess the “economic realities” of the relationship between the worker and the potential vertical joint employer3 – each factor “probative of the core question of whether the worker is economically dependent on the potential employer who, via an arrangement with the intermediary employer, is benefitting from the work.” In support of its “economic realities” approach, the Guidance notes that several Circuit Courts of Appeals have adopted an economic realities analysis for evaluating vertical joint employment under the FLSA, although none have apparently adopted the Department’s MSPA factors wholesale.

The seven “economic realities” factors that provide “guides” for “qualitatively” assessing a vertical jointemployment relationship are:

  1. Directing, Controlling or Supervising the Work Performed: Control, even indirect control, “suggests that the employee is economically dependent on the potential joint employer.”
  2. Controlling Employment Conditions: Power to hire or fire the employee, modify employment conditions, or determine the rate or method of pay, indicates that the employee is economically dependent on the potential joint employer.
  3. Permanency and Duration of Relationship: An indefinite, permanent, full-time or long-term relationship by the employee with the potential joint employer suggests economic dependence.
  4. Repetitive and Rote Nature of Work: Repetitive and rote work, relatively unskilled work or work that requires little or no training indicate that the employee is economically dependent on the potential joint employer.
  5. Integral to Business: If the employee’s work is an integral part of the joint employer’s business, that suggests the employee is economically dependent on the potential joint employer.
  6. Work Performed on Premises: If the employee works on premises owned or controlled by the potential joint employer, that suggests the employee is economically dependent on the joint employer.
  7. Performing Administrative Functions Commonly Performed by Employers: If the employer performs administrative functions for the employee, such as handling payroll, providing workers’ compensation insurance, providing necessary facilities and safety equipment, housing or transportation, or tools and materials required for the work, such factors indicate the employee is economically dependent on the joint employer.

IMPLICATIONS

Employers may wish to review their contracts with vendors.

The Guidance, although not legally binding, is clearly intended as a model for courts to consider and follow. The Guidance makes clear the Department’s motivation for an expansive joint-employer test: the joint employer under an “economic realities” test may “be larger and more established, with a greater ability to implement policy or systemic changes to ensure compliance.” Companies may wish to review their contracts with vendors and service providers in light of the joint-employer analysis in the Guidance. Among other things, companies may wish to consider amending agreements to include language that their supervision of the vendor’s work reflects a “reasonable degree of contract performance oversight,” which the Guidance suggests would not implicate joint-employer status.

The Department has joined the National Labor Relations Board in restating longstanding jointemployer standards.

With this Interpretation, the Department of Labor joins the National Labor Relations Board in efforts to expand the scope of joint-employer liability without legislative action. In Browning-Ferris Industries of California, Case 32-RC-109684, decided on August 27, 2015, the National Labor Relations Board abandoned its longstanding test that an entity must both possess and exercise direct control over employees’ terms and conditions of employment in order to be considered a joint employer and, thus, be required to bargain with a union. The new standard adopted by the National Labor Relations Board provided that a joint-employer relationship may be found merely based on the putative joint employer’s right to control terms and conditions of employment, irrespective of whether such control is directly exercised or exercised at all. Our memorandum on that decision can be found here. With respect to control exercised by the potential joint employer—the first “economic realities” factor—the Guidance, too, states that such control can be indirect “and still be sufficient to indicate economic dependence by the employee.”

The Guidance is part of the Department’s larger focus on expanding coverage under the FLSA.

As noted, in July 2015, the Department issued an Administrative Guidance regarding classification of workers as independent contractors or employees, which stated that the Department believed “most workers are employees under the FLSA’s broad definition” of “to employ.” Our memorandum on that Guidance can be found here. And in June 2015, the Department issued proposed rules designed to limit the number of employees eligible for exclusion from overtime under the FLSA. Our memorandum on those rules can be found here. Together, these pronouncements underscore an active initiative by the Department to increase the number of workers who can claim coverage under the FLSA.