On January 20, 2016, the U.S. Department of Labor’s (DOL) Wage and Hour Division issued an Administrator’s Interpretation that provides fresh guidance for determining when two or more entities will be considered joint employers for purposes of the Fair Labor Standards Act (FLSA). This new guidance follows last year’s DOL Administrator’s Interpretation on the misclassification of employees and is yet another example of the Obama Administration’s ongoing effort to expand the coverage of the federal wage and hour laws.
The new Administrator’s Interpretation, which covers a wide array of business and staffing models, makes clear that the DOL will construe the concept of joint employment broadly. Although the guidance breaks no new legal ground, it sends a clear message to the business community that the DOL will closely scrutinize those relationships where employers share workers or have some shared involvement in the workers’ employment.
Why Should Employers Care?
A determination that two or more companies are joint employers can have important implications under the FLSA.
For starters, when companies jointly employ an employee, that employee’s hours will be aggregated to calculate overtime entitlement. In addition, the joint employers are jointly and severally liable for any failure to comply with the FLSA’s minimum wage and overtime requirements. This means that, if the FLSA is violated, the DOL can hold each employer individually responsible for the entire amount of any wages and overtime due.
Joint employment can also give rise to broader coverage under the FLSA. A company that would otherwise not be subject to the FLSA because it does not meet the $500,000 annual revenue requirement may be covered if it and a joint employer have combined revenues that exceed $500,000.
What Does the New DOL Guidance Do?
The Administrator’s Interpretation addresses two different types of potential joint employment: horizontal and vertical.
According to the DOL, horizontal joint employment exists “where the employee has employment relationships with two or more employers and those employers are sufficiently associated or related with respect to the employee” that they jointly employ the employee. This typically arises when an employee works for two or more “technically separate but related or overlapping” companies.
According to the new guidance, in analyzing whether horizontal joint employment exists, the focus is on the relationship and degree of association between the companies, with consideration given to the following facts:
- Who owns the companies (i.e., does one employer own part or all of the other or do they have any common owners)?
- Do the companies have any overlapping officers, directors, executives, or managers?
- Do the companies share control over operations (e.g., hiring, firing, payroll, advertising, overhead costs)?
- Are the companies’ operations intermingled (for example, is there one administrative operation for both employers, or does the same person schedule and pay the employees regardless of which employer they work for)?
- Does one company supervise the work of the other?
- Do the companies share supervisory authority for the employee?
- Do the companies treat the employees as a pool of employees available to both of them?
- Do the companies share clients or customers?
- Are there any agreements between the companies?
In contrast, vertical joint employment exists when the employee has an admitted and established employment relationship with one company —the intermediary employer—but also performs work for the benefit of another company—the potential joint employer—through some agreement or arrangement between the two companies. Vertical joint employment typically arises when a business uses a third party, such as a leasing agency or staffing company, to fulfill its labor needs.
In determining whether vertical joint employment exists, the focus is on the relationship that the employee has with the business receiving the employee’s services. The ultimate inquiry is whether the employee is economically dependent on that company under a broad “economic realities” analysis. In the new guidance, the DOL has outlined the following factors to be used in this inquiry:
- Does the company direct, control, or supervise the work performed by the employee?
- Does the company control the employee’s work conditions (e.g., have the power to hire fire; determine the employee’s rate rate)?
- Is the relationship between the company and the employee permanent, long-term, or indefinite?
- Is the employee’s work repetitive and rote?
- Is the work an integral part of the company’s business?
- Is the work performed on the company’s premises?
- Does the company perform the administrative functions commonly performed by employers?
What Should Employers Do?
Employers should keep in mind that the DOL intends to consider the issue of joint employment whenever possible in order to ensure optimum compliance with the FLSA. The DOL views the joint employment doctrine as a way to maximize financial recovery for wage and hour violations.
To avoid FLSA liability as a joint employer:
- Be aware of situations that could give rise to a finding of joint employment under the DOL’s broad analysis. Businesses that use staffing companies and labor providers for their labor needs will normally be considered joint employers.
- Consider ways to mitigate your risks in the face of the DOL’s stance. If you use a third party staffing company, you should make sure that that company is reputable, established, and financially sound (i.e., able to pay its share of a back wage determination). It is more important than ever to do the proper due diligence in advance.
- Implement processes to ensure full FLSA compliance. If you use a staffing company that does not pay its employees as required by the FLSA, the DOL may hold you financially liable. Make sure your staffing agreement is clear that the staffing company is responsible for FLSA compliance and provides indemnity to you if you are held liable for the staffing company’s compliance failures.