Published in Law360

Much has been written about the National Labor Relations Board's controversial Browning-Ferris decision that significantly expanded the scope of joint employer liability under the National Labor Relations Act. But virtually no attention has been given to the Fourth Circuit's recent panel decision in Salinas v. Commercial Interiors, Inc.[1], which creates an altogether new and incredibly broad joint employment standard under the Fair Labor Standards Act that makes the NLRB's Browning-Ferris joint employment standard seem temperate at best.

Absent a successful appeal to the U.S. Supreme Court or a successful strategy to cabin the reach of the decision to the Fourth Circuit, the Salinas decision threatens to redefine the contours of joint employer liability under the FLSA and to severely impact key business arrangements. Among other arrangements, the test presents a grave threat to the franchising model.

Case Background

Commercial Interiors Inc. -- the putative joint employer in Salinas -- was a general contractor that offered interior finishing services, such as drywall installation, carpentry, framing and hardware installation. Commercial Interiors, in turn, subcontracted with J.I. General Contractors to provide framing and drywall installation. The plaintiff-employees were employed by J.I. General Contractors as drywall installers. They claimed that J.I. General Contractors failed to pay them overtime wages under the FLSA. They also sued Commercial Interiors on the theory that Commercial Interiors was a joint employer with J.I. General Contractors for purposes of the FLSA violation.

The district court held that the relationship among Commercial Interiors, J.I. General Contractors and the employees was a typical contractor-subcontractor relationship and that Commercial Interiors was not a joint employer of the subcontractor's employees. On appeal, the Fourth Circuit panel disagreed, ruled that Commercial Interiors was a joint employer, and in doing so, set forth a new joint employment test for FLSA violations.

Employment Under the FLSA Must be Interpreted Broadly

The Fourth Circuit panel began by noting that a variety of FLSA-based joint employer tests had developed among the federal circuits and that the Fourth Circuit had never clearly established its own test. The panel then set out to create such a test.

The court concluded that Congress intentionally chose expansive definitions of the terms "employ" and "employee" in the FLSA in order to bring a "broad swath" of workers within the FLSA's protections. Of particular significance to the panel was legislative history reflecting that Congress intended the definition of "employ" under the FLSA to be the "broadest definition that has ever been included in any one act." From there, the court opined that the concept of joint employment under the FLSA should be broader than the common law joint employment test and the joint employment standards under other employment laws (including the Browning-Ferris standard).

The "Completely Disassociated" Joint Employment Test

With that background in mind, the panel held that the FLSA joint employment inquiry involves "one fundamental question: whether two or more persons or entities are not completely disassociated with respect to a worker such that the persons or entities share, agree to allocate responsibility for, or otherwise co-determine -- formally or informally, directly or indirectly -- the essential terms and conditions of the worker's employment." (emphasis added)

The panel identified six nonexhaustive factors that courts should use to guide their analysis of whether putative FLSA joint employers are "completely disassociated":

1. Whether, formally or as a matter of practice, the putative joint employers jointly determine, share or allocate the power to direct, control or supervise the worker, whether by direct or indirect means;

2. Whether, formally or as a matter of practice, the putative joint employers jointly determine, share or allocate the power to -- directly or indirectly -- hire or fire the worker or modify the terms or conditions of the worker's employment;

3. The degree of permanency and duration of the relationship between the putative joint employers;

4. Whether, through shared management or a direct or indirect ownership interest, one putative joint employer controls, is controlled by or is under common control with the other putative joint employer;

5. Whether the work is performed on a premises owned or controlled by one or more of the putative joint employers, independently or in connection with one another; and

6. Whether, formally or as a matter of practice, the putative joint employers jointly determine, share or allocate responsibility over functions ordinarily carried out by an employer, such as handling payroll; providing workers' compensation insurance; paying payroll taxes; or providing the facilities, equipment, tools or materials necessary to complete the work.

Is the Fourth Circuit's Test Correct?

The implications of the Fourth Circuit's "completely disassociated" test cannot be overstated. Unlike virtually all other FLSA joint employment standards (and even the NLRB's Browning-Ferris standard), the "completely disassociated" test focuses on the relationship between the two entities, not on the relationship between the putative joint employer and the employee. According to the court, focusing the joint employment analysis on the relationship of the two entities is the only way to "squarely address the `joint' element of the `joint employer' doctrine."

Though this reasoning has some theoretical, intellectual appeal, it in practice sets up an unrealistic and unworkable standard. Indeed, the court's new test essentially sets up a presumption that two collaborating businesses are joint employers unless they can prove that they are completely disassociated from one another. This seems difficult, if not impossible in most cases. Whether it be a hotel or restaurant franchise arrangement, a vendor or supplier agreement, or a contractor-subcontractor relationship, some degree of "association" will always be necessary in order to make the arrangement work. The panel appears to have ignored or neglected to account for these practical realities of most third-party business relationships. In its view, either the two entities are completely disassociated from one another, or they are joint employers. No other court, and not even the Obama-era U.S. Department of Labor, has interpreted joint employment this broadly.

Aside from the practical implications, the Fourth Circuit's new test incorrectly conflates "vertical" and "horizontal" employment. More specifically, the panel in Salinas relied primarily on 29 C.F.R. 791.2(a), an old and infrequently cited DOL regulation that addresses "horizontal" joint employment, in which an employee is admittedly employed by two separate entities and the question is whether those two entities are joint employers of the employee for purposes of aggregating the employee's hours worked for overtime purposes.[2] Because the employee is admittedly an employee of both entities in a horizontal joint employment scenario, the joint employment question correctly focuses on whether the entities are sufficiently disassociated from one another to avoid jointly employing the employee in question.

But horizontal joint employment is a completely different scenario than the case before the Fourth Circuit in Salinas, which involved the more common "vertical" joint employment scenario. In vertical joint employment scenarios, the employee is employed by only one entity and the question is whether another entity should also be deemed the employee's employer (as was the case in the NLRB's Browning-Ferris decision). In that context, the focus always has been, and always should be, on the relationship between the putative joint employer and the employee, not the relationship between the two entities.

The DOL's wage and hour administrator recognized this important distinction in a Jan. 20, 2016, administrator's interpretation regarding joint employment under the FLSA.[3] In that administrator's interpretation, the administrator discussed the important differences between horizontal and vertical joint employment scenarios, and he specifically cited to 29 C.F.R. 791.2(a) as a horizontal joint employment regulation. Yet the Fourth Circuit's opinion makes no mention of the administrator's interpretation or the distinction between horizontal and vertical joint employment.

In fact, the DOL, which submitted amicus briefs in Salinas, did not advocate for a joint employment new test or cite to the "completely disassociated" regulation. Although the DOL favored a finding of joint employment, the DOL took the position that the court should apply the economic realities test, as applied in other circuits in FLSA cases. The panel appears to have come up with its "completely disassociated" test on its own. In this way, the Fourth Circuit's new standard is based almost entirely on a mistaken reading of an FLSA regulation and is completely out of step with the tests of other federal appellate courts.

In addition to the incredibly broad "completely disassociated" standard, the Fourth Circuit panel's opinion also suggests that a putative joint employer's reserved (but not exercised) indirect control is sufficient to find a joint employment relationship. Readers familiar with the NLRB's Browning-Ferris joint employment standard will recognize the concepts of reserved and indirect control. But even the NLRB made clear in Browning-Ferris that reserved, indirect control, alone, was not sufficient to create joint employment liability. The Fourth Circuit panel, on the other hand, held the opposite. Indeed, the court went much further and stated that "one factor alone" can serve as the basis for finding that two entities are not "completely disassociated" and thus lead to a joint employment finding.

Where Do We Go From Here?

The Fourth Circuit's new test marks a clear departure from existing case law and creates a test that could cause an even more substantial business disruption than Browning-Ferris. For now, the Salinas decision applies only to FLSA litigation in the Fourth Circuit. However, several federal circuits have yet to adopt a definitive FLSA joint employer standard, and those circuits will be urged by plaintiffs to adopt the Salinas standard.

As a result, U.S. Supreme Court intervention may be one of the only options for stopping the proliferation of the Fourth Circuit's new standard before it starts.