Seyfarth Synopsis: On April 1, 2019, the U.S. DOL announced a proposed rule to clarify joint employment under the FLSA. The rule would establish a four-factor balancing test for joint employer status. It also rejects various factors that have fueled recent litigation, e.g., a worker’s economic dependence on a potential joint employer, the potential employer’s business model, and its unexercised power over the worker.

This is the third proposed rule that the DOL has issued in a month’s time. Like the other proposals (concerning overtime exemptions and the regular rate of pay), this rule—if adopted—should provide welcome clarity for many businesses. This is particularly true for those most targeted by joint employment litigation, such as franchisors, staffing agencies, and businesses with subsidiaries or affiliates.

A Quick History

In 1958, the DOL issued a formal interpretation of joint employment under the FLSA. Under that interpretation, multiple entities can be deemed joint employers if they are “not completely disassociated” with respect to a given worker. Giving meaning to this phrase, and establishing how significant an entity’s connection to or involvement with a worker must be before it will be deemed to jointly employ that individual, has proven difficult.

Despite being the subject of intense debate and administrative focus, the DOL’s joint employment interpretation has not been subject to formal, substantive change in the 60 years since it was issued.

In January 2016, then WHD Administrator David Weil issued an Administrator’s Interpretation (“AI”) concerning joint employment under the FLSA. In the AI, Dr. Weil published a view that joint employment “should be defined expansively.” The AI focuses the inquiry, in part, on a worker’s economic dependence on the potential joint employer. This standard was intended to be “as broad as possible.”

A new administration arrived later that year, and with it came the demise of the AI. In June 2017, DOL Secretary Alexander Acosta withdrew the AI, which had by that time drawn the ire of many businesses for what was seen as the use of sub-regulatory action to drive an over-expansion of the joint employment standard.

Four Factors and a Few Hypotheticals

With its proposed new rule, the DOL endeavors to undertake formal rulemaking and establish a clear, four-factor test for determining whether an entity is a joint employer. The DOL also provides a few examples applying the rule to hypothetical scenarios.

The proposed four factors derive, in part, from Bonnete v. California Health & Welfare Agency, a Ninth Circuit decision from 1983. They include whether the potential joint employer has the power to:

  • Hire or fire the employee;
  • Supervise and control the employee’s work schedules or conditions of employment;
  • Determine the employee’s rate and method of payment; and
  • Maintain the employee’s employment records.

The proposed rule also includes a set of hypothetical examples that are aimed to help illustrate the contours of the rule. The examples include, but are not limited to:

  • An office park that hires a janitorial services company to clean after-hours. The park pays the company a fixed fee and reserves the right to supervise the janitorial employees in their performance of cleaning services. Office park personnel do not set the janitorial employees’ schedules and, in fact, do not supervise the janitorial employees. Outcome: the office park is not a joint employer of the janitorial employees.
  • An individual works 30 hours per week as a cook at one restaurant, and 15 hours per week at a different restaurant affiliated with the same nationwide franchise. The restaurants are locally owned and managed by different franchisees that do not coordinate in any way with respect to the employee. Outcome: the restaurants are not joint employers of the cook. The fact that both restaurants are part of the same nationwide franchise is not relevant.
  • A franchise owns a hotel and is a licensee of a global franchisor’s brand. The franchisor-brand provides the hotel with samples of an employment application, employee handbook, and other forms and documents for use in operating the franchise. The licensing agreement is an “industry-standard” document explaining that the franchisee is solely responsible for daily operations, including hiring/firing, setting pay rates, maintaining records, and supervising the work. Outcome: the global franchisor is not a joint employer of the hotel’s employees.
  • A country club contracts with a landscaper to maintain its golf course. The contract does not give the club the authority to hire, fire, or supervise landscaping company employees. In practice, however, a club official oversees the landscapers’ work, keeps intermittent records of their work, and indirectly (i.e., through the landscaping company) terminates a landscaping employee for failing to follow a club official’s instructions. Outcome: the country club is a joint employer.
  • A packaging company requests workers on a daily basis from a staffing agency. The packaging company determines each worker’s rate of pay, supervises their work, and analyzes customer demand in significant detail to continuously adjust its demand for workers and their individual schedules, sending some home based on workload. Outcome: the packaging company is a joint employer.

Defining the Irrelevant

The proposed rule is notable not just for the factors it deems relevant and the examples that it provides, but also—if not more so—for the factors that it deems not relevant.

First, the DOL explains that, in a departure from Bonnete, the “ability, power, or reserved contractual right to act with respect to the employee’s terms and conditions of employment would not be relevant to that person’s joint employer status under the Act.” Instead, only actions actually taken would matter.

Second, the proposed rule slams the door on economic dependence as a relevant factor for joint employment. Factors that would fall into the bucket of irrelevant economic dependence factors include, for example, whether the employee is in a job requiring special skill, has the opportunity for profit or loss based on his or her managerial skill; and whether he or she invests in equipment required to do the job.

Third, the proposed rule explains that an entity’s business model (e.g., a franchise model), certain business practices (e.g., allowing an employer to operate a store on the person’s premises), and certain agreements (e.g., requiring an employer in a business contract to institute sexual harassment policies) do not move the joint employment needle.

What’s Next?

The proposed rule is welcome news for businesses targeted by joint employment litigation, but it is important to keep in mind that it is not final. The public will have 60 days to comment on the proposed rule, beginning on the date that the proposal is published in the Federal Register, and it is possible (perhaps even likely) that DOL will modify the final rule based on the feedback it receives.

In addition, it is important to remember that the rule is proposed rule is focused on joint employment under the FLSA. It does not touch upon joint employment under other federal laws or any state laws.