On January 20, 2016 the Wage & Hour Division of the United States Department of Labor issued its latest tool to combat what it calls “the fissured workplace,” issuing an Administrator’s Interpretation (AI) that expands the concept of joint employment under the Fair Labor Standards Act (FLSA).  The fissured workplace is the situation in which businesses change their staffing model by using third-party management companies, independent contractors, staffing agencies, temporary services, or other providers of labor to meet their need for workers.  The AI notes that more and more businesses are adopting these alternate staffing models, and that an expanded interpretation of joint employment is necessary to satisfy coverage thresholds under the FLSA, to achieve financial recovery for violations, and to hold all responsible parties accountable for their legal obligations.  Joint employment can exist when a worker is employed by two or more employers, such that both employers are responsible for compliance with the law — in this instance, the minimum wage and overtime requirements of the FLSA.

The AI begins by noting the long-standing principle under the FLSA that an employee can have two or more employers for the work that he or she performs.  When two or more employers jointly employ one employee, his or her hours worked in a work week from all of the joint employers are aggregated and considered as one employment, including for purposes of calculating overtime pay.  When joint employment exists, all of the joint employers are jointly and severally liable for compliance with the FLSA.

The AI identifies two types of joint employment, “horizontal” and “vertical.”  Horizontal joint employment will be found when an employee is employed by two or more employers who are technically separate but are related or overlapping entities.  For example, horizontal joint employment applies where a restaurant server works for two separate restaurants that are owned and operated by the same entity.  In that instance, the employee’s work for both restaurants is considered as one employment for counting hours worked in a week and determining overtime pay.  In analyzing horizontal joint employer status, the Wage & Hour Division looks at eight factors:

  • Have shared ownership;
  • Have overlapping officers, directors, executives, or managers;
  • Share control over operations;
  • Have intermingled operations;
  • Involve one potential joint employer supervising the other;
  • Treat employees as a pool of employees available to both of them;
  • Share clients or customers; and
  • Have any agreements with each other.

Vertical joint employment describes arrangements where an employee is employed by an entity that supplies labor, such as a staffing agency, subcontractor, labor provider, or other intermediary, but the economic realities show that the employee is economically dependent on (and therefore employed by) another entity.  This “other employer” typically contracts with the intermediary employer (the “supplier”) to receive the benefit of the employee’s labor, i.e., is a “user” of labor.  The vertical joint employment analysis focuses on the economic realities of the working relationship between the employee and the user of the labor.  For example, vertical joint employment can be found where nurses are placed at a health care facility by a staffing agency, or where a temporary service supplies workers to a warehouse.

The Wage & Hour Division will review seven factors to determine the core question of whether the employee is economically dependent on the user employee:

  • Directing, controlling, or supervising the work performed.  The more control and supervision the user employer has over the employee, the more likely it is that there is a vertical joint-employment relationship.
  • Controlling employment conditions.  Control over economic conditions indicates economic dependence and therefore joint employment.
  • Permanency and duration of relationship.  A longer, more permanent relationship with the user employer suggests economic dependence and therefore joint employment.
  • Repetitive and rote nature of work.  Rote, repetitive, unskilled work indicates economic dependence and therefore joint employment.
  • Integral to business.  If the employee’s work is integral to the business of the user employer, that indicates economic dependence and therefore joint employment.
  • Work performed on premises.  If the employee performs work on the premises of the user employer, this indicates economic dependence and therefore joint employment.
  • Performing administrative functions commonly performed by employers.  If the user employer performs administrative functions such as payroll and workers’ compensation insurance, this indicates economic dependence and therefore joint employment.

The AI emphasizes that these seven factors should be applied to achieve the broad scope of joint employment contemplated by the FLSA.

The AI concludes by noting that as a result of continued structural changes in the American workplace, the possibility that a worker is employed jointly by two or more employers has become common.  In order to ensure that jointly employed workers receive the legal protections to which they are entitled, and that employers are held to their legal obligations, Wage & Hour investigators are instructed to consider “regularly” the possibility of joint employment.

Meaning for Employers

This AI marks the Obama Administration’s latest attempt to expand the coverage of federal employment laws to joint employers.  In August 2015, the National Labor Relations Board expanded the concept of joint employer under the National Labor Relations Act. [See Calfee First Alert: NLRB Takes Aim at Contingent Workforce Arrangements]  OSHA has joined the party, considering joint employer liability under worker safety laws.  And, of course, Wage & Hour issued a previous AI in July 2015 [See Calfee First Alert: DOL Issues New Guidance on Worker Misclassification] broadly defining the phrase “to employ” under the FLSA so as to address misclassification of workers as independent contractors.

The new AI serves notice on staffing agencies, temporary agencies, Professional Employer Organizations (PEOs), and similar suppliers of labor — and the employers who use workers provided by such entities — that the use of alternative staffing models will be subject to greater scrutiny under the FLSA.  That increased scrutiny could result in companies being held liable for the Wage & Hour violations of the entities with whom they contract for providing workers.  For “supplier “ and “user” employers alike, that means contracting with reputable counterparties with a strong track record of FLSA (and other legal) compliance (or at least an absence of a history of violations), making sure that the other entity has sufficient assets to cover any liabilities for future potential violations, and making sure indemnification clauses in staffing contracts protect one party in case of FLSA violations by the other party.