It seems like an easy question: who is an “employer” liable for paying minimum wage and overtime under the Fair Labor Standards Act (FLSA or Act)? The answer is not always straightforward when there are two potential joint employers, at least in part since the law varies from jurisdiction to jurisdiction on this important issue.
The parties to a recent case were looking to the U.S. Supreme Court to resolve the issue and establish a nationwide joint-employer test. But earlier this month, the Supreme Court denied a petition to hear the case of Hall v DirecTV which would have allowed the Court to weigh in on the joint-employer issue.
How Joint-Employment Situations Arise
Many businesses and industries face joint-employer situations, including the construction industry, government contractors, franchisors, and other related entities. In addition, organizations that use intermediaries such as staffing agencies, employee leasing companies, and professional employer organizations (PEOs) to recruit, hire, and administer workers also could be subject to joint-employment situations.
In Hall, thousands of technicians who installed and repaired satellite systems for DirecTV customers nationwide were classified and paid as independent contractors. DirecTV contracted with numerous intermediary entities known as Home Service Providers and Secondary Service Providers (Providers) to obtain technicians. Over time, DirecTV acquired some of these Providers and others remained independent. These Providers served as middle-managers between DirecTV and the individual technicians, implementing and enforcing DirecTV’s hiring criteria, relaying scheduling decisions from DirecTV using DirecTV’s centralized work-assignment system, maintaining files on each technician, and otherwise supervising the technicians.
In their lawsuit against DirecTV and their respective Providers, the technicians alleged that they should have been treated as employees rather than independent contractors, seeking to hold both DirecTV and the Providers jointly liable for unpaid overtime pay and minimum wage violations. In their complaint, the technicians asserted that DirecTV dictated nearly every aspect of their work through agreements with the Providers that directly employed the technicians. They alleged that the agreement required technicians to purchase and wear DirecTV shirts, carry DirecTV identification cards, display the DirecTV logo on their vehicles, review DirecTV training materials, follow DirecTV’s standardized policies and procedures, and receive their work assignments through DirecTV’s system. In addition, they asserted that DirecTV employees exercised quality control over the technicians’ work, imposing compensation-related penalties for unsatisfactory service and allowing DirecTV to effectively terminate technicians by not assigning them any work orders through the company’s system.
The technicians filed FLSA collective-action lawsuits against DirecTV in courts across the United States. In the case brought in Maryland, a federal judge dismissed the case on the pleadings, ruling that the technicians had failed to adequately allege facts showing that DirecTV was a joint employer since DirecTV did not directly hire or fire the technicians and DirecTV did not otherwise control their compensation.
Fourth Circuit Court Takes Expansive Approach
On appeal, a Fourth Circuit panel reversed, concluding that the technicians had alleged sufficient facts based on a more lenient standard for joint employment. Disregarding the approach in other jurisdictions, the Hall court held that the focus for joint employment should not be on each employment relationship as it exists between the worker and the party asserted to be a joint employer. Rather, relying on a particular DOL regulation, the court said the appropriate analysis is whether the two putative joint employers are “not completely disassociated” with respect to the worker. Accordingly, the Hall approach involves a “two-step framework” where the court (1) determines whether the two putative employers “codetermined the key terms and conditions of a worker’s employment” and (2) if the answer is yes to the first inquiry, the court then asks whether “the two entities’ combined influence over the essential terms and conditions of the worker’s employment render the worker an employee as opposed to an independent contractor.”
The Hall “not completely dissociated” standard is at odds with the majority approach in eight other circuits and trial courts in Colorado (although no Tenth Circuit case has addressed this issue) which follow the “economic realities” test for joint employment – a direct examination of the employment relationship as it exists between the worker and each putative employer. Courts apply different and varying factors in applying the economic realities analysis across the United States, weighing as many as ten different factors such as the power to hire and fire workers, the permanence of the working relationship, and control over work schedules, payroll, benefits, and employment records. The overarching concern is whether the alleged employer possesses direct or indirect power to control significant aspects of the worker’s employment.
Given the Fourth Circuit’s departure from the majority approach, DirecTV appeared to have a good chance at getting the Supreme Court to take up the joint-employer issue, but the Court denied review. That lets the Fourth Circuit’s decision stand, leading to a much lower bar for plaintiffs in the Fourth Circuit.
Importance of Certainty in Joint-Employer Determination
Franchisors, contractors, subcontractors, affiliated businesses, staffing agencies, and PEOs all face increased liability when there are different joint employer standards for FLSA purposes depending on the jurisdiction. First, these types of entities and their attorneys need to be aware that the Fourth Circuit’s broad joint-employer test is still the law in Maryland, Virginia, West Virginia, North Carolina, and South Carolina. It also will be used by plaintiffs’ attorneys in other circuits to fuel claims of joint employment even when there is no direct control over workers by the putative employer.
Second, it makes it very difficult for entities that operate in numerous jurisdictions to have uniform agreements. Franchisors, contractors, staffing agencies, and other affected entities may need to draft their business agreements to minimize the risk of finding joint-employer status as dictated by the joint employer test in each location. Such entities should consider including provisions to show that the entities are separate and distinct as they relate to the terms and conditions of employment, avoiding control over hiring and firing decisions, setting pay, and directing the day-to-day duties of those workers. In addition, related entities should avoid sharing managers, employment policies, HR administration, health insurance and other benefit plans, workers’ compensation insurance, and other workplace-related matters.
Finally, employers who benefit by work being done by employees of another entity need to instruct their own personnel on how to avoid exerting the type of direct control that can lead to a finding of joint employment. The most ironclad agreement won’t be worth the paper it is written on if the workers are treated like direct employees by those in charge of the operation.
We don’t know why the Supreme Court declined to resolve the FLSA joint-employer test using the Hall case this term. Perhaps it did not want to take on the joint-employer issue on a motion to dismiss, with only pleadings setting forth allegations rather than having evidence and testimony to establish the relationships in the case. Or, perhaps the Court is waiting to see if Congress or the Department of Labor will issue new rules on this topic, as the National Labor Relations Board recently did. (See our earlier post on the NLRB’s reversal and note that the House passed legislation addressing this issue in November, but the bill has not passed the Senate.)
Whatever the reason, if you think your organization might be named in a lawsuit as a “joint employer,” review your agreements, policies, and practices to determine if any changes can or should be made to mitigate the risk of such a lawsuit.