The U.S. Department of Labor has announced what it describes as the first meaningful update in more than 60 years to the regulation interpreting joint employer status under the Fair Labor Standards Act.

The FLSA is the federal law that requires covered employers to pay employees at least the federal minimum wage and overtime for every hour worked over 40 in a workweek unless the employee is exempt from such requirements. The FLSA defines an “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee.” This definition allows for an employee to have one or more joint employers who will be jointly and severally liable (in other words, share responsibility) for any wage and hour violations.

Under the existing “complete disassociation” test, an employer is a joint employer if the two potential employers do not act entirely independently of each other. Not surprisingly, this regulation has been interpreted in various ways by different courts and federal agencies. This inconsistency has made it difficult for employers to predict when they may be exposed to liability. The new rule attempts to eliminate some of this uncertainty.

What Does the New Rule Change?

Joint employer relationships arise in two scenarios:

  • Where an employer suffers, permits or otherwise employs an employee to work but another individual or entity simultaneously benefits from that work OR
  • Where two or more employers employ a worker for separate sets of hours in the same workweek

The new rule, which takes effect on March 16, 2020, changes only the “complete disassociation” analysis used to determine whether a joint employment relationship exists under the first scenario.

A Balancing Test

The new rule introduces a balancing test that focuses on the actual exercise of control over an employee by considering whether a potential joint employer:

  • Hires or fires the employee
  • Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree
  • Determines the employee’s rate and method of payment
  • Maintains the employee’s employment records

The weight given to each of these “control factors” will vary depending on the particular circumstances of a case, but the rule makes clear that maintenance of employment records alone is insufficient to establish joint employer status. Additional factors may be relevant, but only if they are indicia of whether the potential joint employer exercises significant control over the terms and conditions of the employee’s work.

The rule also specifies factors that are not relevant to determining joint employer status. These include:

  • An employee’s “economic dependence” on a potential joint employer, including factors traditionally used to establish whether a worker is an independent contractor
  • Whether a potential joint employer operates as a franchisor or operates using a similar business model
  • The potential joint employer’s contractual agreements requiring the employer to comply with its legal obligations or to meet certain health and safety standards
  • The potential joint employer’s contractual agreements requiring quality control standards to ensure the consistent quality of work product, brand, or business reputation
  • The potential joint employer’s practice of providing the employer with a sample employee handbook or other forms, allowing the employer to operate a business on its premises (including “store within a store” arrangements), offering an association health or retirement plan to the employer or participating in such a plan with the employer, jointly participating in an apprenticeship program with the employer, or any other similar business practices

Scenario 2

The new rule does not make any substantive changes to the standard for determining joint employer liability under the second scenario (i.e., where two or more employers employ a worker for separate sets of hours in the same workweek). Under the second scenario, employers will still be considered joint employers only if they are sufficiently associated with respect to the employment of the employee. Sufficient association generally exists where there is an arrangement to share the employee’s services, one employer is acting in the interest of the other employer in relation to the employee, or they share control of the employee.

Takeaway

The Department’s new rule will hopefully provide much needed clarity for employers attempting to determine their exposure to liability in potential joint employer situations. However, it will be important to see whether courts will defer to this new regulation, and if they do so, how courts interpret and apply the new four-factor test. Because the Department has characterized the rule as interpretive, courts may have some discretion over how much deference, if any, they give this new rule.

Future administrations could, of course, choose to modify or reverse the rule. Employers should also keep in mind that the joint employment standard may be different under state law.