In a recent OnPoint, Dechert discussed the National Labor Relations Board’s controversial decision in Browning-Ferris Industries of California, Inc.,1 in which the Board abandoned its long-standing joint employer test in favor of a standard pursuant to which an entity’s “right to control” employees’ terms and conditions of employment, even when unexercised, could be sufficient to subject the entity to liability as a joint employer. On January 20, 2016, the Wage and Hour Division of the U.S. Department of Labor (“DOL”) issued an Administrator’s Interpretation under the Fair Labor Standards Act (“FLSA”) and the Migrant and Seasonal Agricultural Worker Protection Act (“MSPA”) that further confirms the significant risks faced by entities that are parties to “non-traditional” employment arrangements.2 Of particular significance to many employers is the DOL’s emphasis on joint employer liability in so-called “vertical” employment relationships, including the potential ways in which parent companies and other owners can be deemed joint employers with other entities in the chain of ownership.
I. The General Joint Employer Standard under the FLSA and MSPA
According to Wage and Hour Division Administrator David Weil, issuance of the Administrator’s Interpretation was prompted by an increase in the use of “varying organizational and staffing models” that “ha[s] made joint employment more common.” “It is a longstanding principle under both statutes,” Weil wrote, “that an employee can have two or more employers for the work that he or she is performing.” The consequences of a finding of joint employment include that “[an] employee’s hours worked for all of the joint employers during the workweek are aggregated and considered as one employment, including for purposes of whether overtime pay is due,” and that “all of the joint employers are jointly and severally liable for compliance with the FLSA and MSPA.”
As the DOL has frequently emphasized, the definition of “employ” under the FLSA—“to suffer or permit to work”—has been described as “the broadest definition that has ever been included in any one act.”3Accordingly, the DOL and courts have adopted variations on the “economic realities test” for determining whether an individual is an employee of a particular entity. This test, the DOL has consistently stated, is “notably broader than the common law concepts of employment and joint employment, which look to the amount of control that an employer exercises over an employee.”
II. Horizontal and Vertical Joint Employment Relationships
A. Horizontal joint employment determinations focus on the relationship between alleged employing entities
One of the notable aspects of the Administrator’s Interpretation is its focus on the distinction between “horizontal” and “vertical” employment relationships. Horizontal joint employment, Administrator Weil wrote, exists “when two (or more) employers each separately employ an employee and are sufficiently associated with or related to each other with respect to the employee.” In contrast, vertical joint employment relationships arise when “an employee of one employer [referred to as an ‘intermediary employer’ by the DOL] is also, with regard to the work performed for the intermediary employer, economically dependent on another employer.”
As stated in the Administrative Interpretation, the focus in a horizontal joint employment situation “is the relationship between the two (or more) employers.” Examples of such arrangements that the DOL identified include restaurants that are commonly owned and have the same managers controlling each restaurant, or home health care providers that share staff and have common management. Under the DOL’s FLSA regulations, joint employment will typically be found where: 1) there is an arrangement to share or interchange employees’ services; 2) one employers acts “directly or indirectly in the interest of another employer”; or 3) the employers “may deemed to share control of the employee…by reason of the fact that one employer controls, is controlled by, or is under common control with the other employer.”4Significantly, although the FLSA regulation does not purport to be limited to horizontal joint employment scenarios, the DOL seems to suggest in the Administrative Interpretation that the regulation (and in particular its reference to “control” of an employee) does not govern joint employment in vertical employer arrangements.
Among the factors that the DOL suggested should be considered in making the determination of whether two entities are “horizontal” joint employers are:
- The ownership of the potential joint employers
- Overlap in officers, directors, executives and managers
- Sharing of control over operations
- Sharing of supervisor authority over the employee
- Treatment of employees as a “pool” available to both entities
- Agreements concerning employees
Where two entities are considered joint employers, an “employee’s work for the joint employers during the workweek is considered as one employment, and the joint employers are jointly and severally liable for compliance, including paying overtime compensation for all hours worked over 40 during the workweek.”
B. The critical issue in determining vertical joint employment is the relationship between an employee and the alleged employing entities
According to the DOL, the focus in determining joint employment in a “vertical” employment scenario is on the relationships between the employee and the intermediary and potential joint employer “to determine whether the employees are economically dependent on those potential joint employers and are thus their employees.” Typically, Weil noted, there is an “established or admitted” employment relationship between the employee and the intermediary employer, but the work at issue is “also for the benefit of the other employer.” Among the types of entities that are frequently considered to be “intermediary employers,” the DOL stated, are staffing agencies, subcontractors and labor suppliers, and “potential joint employers” include parent corporations, “higher-tier contractors,” and staffing agency clients.
The regulations issued by the DOL under the FLSA do not include a list of factors for determining joint employment in vertical employment arrangements. Such a list has, however, been included in the Department’s MSPA regulations.5 In the Administrator’s Interpretation, the DOL took issue with courts that have found that the MSPA regulations are not applicable in cases under the FLSA, asserting that “using the joint employment factors identified in the MSPA regulation in an FLSA case is consistent with both statutes and regulations.” The MSPA regulations identify seven factors to be considered in determining whether an individual is economically dependent on an alleged joint employer:
- Whether the entity directs, controls or supervises the work performed
- Whether the entity controls employment conditions (e.g., right to hire and fire, determine compensation, etc.)
- Permanency and duration of relationship
- Whether the work is repetitive, unskilled or rote in nature
- Whether the work is integral to the alleged joint employer’s business
- Where the work is performed
- Whether the alleged joint employer performs administrative functions for the employee, such as payroll, provision of workers’ compensation insurance, provision of tools and materials, etc.
The DOL noted that courts differ in whether they apply some or all of these factors to determine the existence of an employment relationship. The DOL also chastised some courts for “apply[ing] factors that address only or primarily the potential joint employer’s control.” This approach, the DOL asserted, “is not consistent with the breadth of employment under the FLSA.”
III. Challenges for employers of all types
The joint employment doctrine is not a new development under the FLSA. However, the DOL’s emphasis on the breadth of employment relationships under that statute, particularly in the parent/subsidiary and staffing agency contexts, and its suggestion that joint employment relationships are now “more common,” should put employers on notice that the risks of joint employment must be carefully considered. Companies should be aware that they face significant risks under the FLSA (not to mention the National Labor Relations Act and other laws) that they can be held liable under a joint employer theory for wage and hour violations of subsidiaries, subcontractors, staffing agencies and other third parties. Further, they must be cognizant of the potentially significant differences between the varying tests applicable under different employment statutes, particularly in light of the DOL’s repeated attempts to establish that “control” is not the proper touchstone for employment status determinations under the FLSA and MSPA.