On January 12, 2020, the U.S. Department of Labor (DOL) issued its final rule updating and revising its interpretation of joint employer status under the Fair Labor Standards Act (FLSA). The new rule simplifies the FLSA joint employer analysis with a four-factor test for determining whether workers are jointly employed by associated businesses or persons. The DOL’s changes are the first meaningful revisions since the department’s interpretive regulation was issued 60 years ago. According to the department, the purpose of the rule is “to promote certainty for employer and employees, reduce litigation, promote greater uniformity among court decisions and encourage innovation in the economy.” Although application of this final rule is limited to FLSA wage and hour issues, the National Labor Relations Board and the Equal Employment Opportunity Commission are expected to similarly revisit the joint employer analysis in their respective contexts.

History

The new DOL rule replaces an interpretation that had broadened liability for joint employment under the FLSA. In 2016, former head of the Wage and Hour Division David Weil issued guidance that increased scrutiny of situations in which multiple companies might employ workers jointly. In 2017, the DOL rescinded Weil’s interpretation and in April 2019, provided a “Notice of Proposed Rule Making” relating to the joint employer test. The final rule adopted on January 12, 2020, makes certain changes to and clarifications of the April 2019 proposed version. The rule takes effect on March 16, 2020.

Four-factor balancing test

The four-factor balancing test will be used in situations where an employee performs tasks for one employer that simultaneously benefit another business or person, to determine if that other business or person is a joint employer. The four factors look to whether the potential joint employer:

  1. hires or fires the employee;
  2. supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
  3. determines the employee’s rate and method of payment; and
  4. maintains the employee’s employment records.

No one single factor is controlling and the weight to be given each factor will vary on a case-by-case basis. Still, the new rule’s pro-business approach clarifies that a joint employer under the FLSA must actually exercise, directly or indirectly, one or more of the above four factors.

In addition, the final rule states that an employee’s economic dependence on the potential joint employer no longer has any bearing on joint employer liability under the FLSA. This is an important departure from the past and significantly reduces joint employer situations, especially in the franchise context. The rule cites specific factors that are not to be considered because they go to an employee’s economic dependence on the alleged joint employer. Examples of such factors specified in the rule include whether the employee’s work requires special skill; whether the employee has the opportunity to control profit and loss; and whether the employee invested in equipment or materials. These “economic reality” concepts are no longer part of the FLSA’s joint employer analysis.

Practical tips

The new rule presents a great opportunity for companies to review current relationships with workers whom they do not employ but from whom they receive some type of beneficial service. The final rule’s simplified, pro-business approach provides a model to follow for making changes now, if warranted, to further mitigate risk.