When do your business relationships make you a joint employer? Fortunately, the DOL recently published a Notice of Proposed Rulemaking with changes to regulations regarding when two or more entities should be treated as “joint employers” under the FLSA. This will help answer the question of when you and the business partner share legal responsibility for an employee’s wages and hours worked for either entity.
This proposed rule is the DOL’s first major overhaul of joint employer regulations since 1958.
What’s the Law as it Currently Stands?
In 1939, the DOL first recognized that two or more entities may jointly employ a single employee and share legal responsibility for that employee’s wages. About 20 years later, in 1958, the DOL articulated a formal standard for identifying a joint employment relationship (currently codified at 29 C.F.R. §791). Under Section 791.2, the existence of a joint employment relationship depends on whether two entities are acting “entirely independently of each other” and are “completely disassociated” with respect to the “employment of a particular employee.” The code specifically provides:
When an employee either:
(a) performs work that simultaneously benefits two or more employers; or
(b) works for two or more employers at different times during the workweek a joint employment relationship “generally” exists if:
1. The employers have an arrangement to share the employee’s services;
2. One employer is acting directly or indirectly in the interest of the other employer; or
3. The employers directly or indirectly “share control of the employee,” because one employer controls, is controlled by, or is under common control with the other employer.
Clear as mud, right?
Unfortunately, the existing rule’s focus on whether entities are “completely disassociated” has not produced a coherent test for distinguishing separate employment from joint employment. Presently, federal courts have no uniform standard and, as a result, have developed many differing multi-factor tests. For example, the Ninth Circuit set out a four-factor test in Bonnette v. California Health & Welfare Agency as compared to the Second Circuit’s 10-factor test as set out in Zheng v. Liberty Apparel Co., as compared to other circuits’ use of the economic realities test, which considers whether an employee is “economically dependent” on the putative employer.
Under the current regulations, companies operating in multiple jurisdictions risk being subject to joint employer liability in one jurisdiction, but not in another, for the same business practices.
What is the DOL Proposing To Change?
As a preliminary matter, the DOL proposes to clarify Section 791.2 to identify two situations that may give rise to a joint employment relationship.
Same Employee, Separate Duties and Work. In the first scenario, Company A employs Worker for one set of hours in a workweek, and Company B employs Worker for a separate set of hours in the same workweek.
Under the DOL’s proposed revisions to Section 791.2, the “not completely disassociated” standard would apply to determine if Company A and Company B jointly employ Worker.
Same Employee and Work, Two Companies Benefit. In the second scenario, Company A employs Worker during a workweek, but Company B simultaneously benefits from that work.
Under this scenario — which encompasses franchisor-franchisee, contractor-subcontractor, and similar business relationships — the DOL’s revision to Section 791.2 would eliminate the “not completely disassociated” standard and replace it with a “four-factor balancing test” that examines which business:
- Hires or fires the employee;
- Supervises and controls the employee’s work schedule or conditions of employment;
- Determines the employee’s rate of pay and method of payment; and
- Maintains the employee’s employment records.
No single factor would be dispositive, and whether joint employment exists would still depend on the particular facts of each case. However, the DOL’s revision would make several important clarifications, including the following:
- The inquiry would focus on whether the employer actually exercises sufficient control over a worker, rather than the “ability, power, or reserved contractual right” to take action in relation to the employee.
- A worker’s economic dependence on a company such as whether the employee is in a specialty job, has the opportunity for profit or loss, or invests in equipment or materials required for work, would not be relevant to the joint employer analysis.
- No particular business model (i.e. franchisee/franchisor model) or business practice (i.e. providing a handbook or offering a health or retirement plan) would make joint-employer status more or less likely.
- The revisions would add several examples of business relationships that do and do not constitute joint employment relationships under the FLSA.
The DOL’s aim in revising 29 C.F.R. §791.2 is clarity and uniformity. According to the DOL, the proposed revisions are meant to ensure that employers and joint employers clearly understand their responsibilities with regard to wages. While the FLSA does not expressly grant the DOL the authority to define joint employment, an agency’s interpretation of a statute is important, and courts may defer to it. Also, the exemplary fact patterns that are provided with the proposed rule will undoubtedly be useful to companies trying to assess the risk that they could be deemed a joint employer under the FLSA.
The DOL has previously stated that it expected to publish a final joint employer rule by year-end. That projected deadline now seems aspirational, and the final rule publication may be pushed to early 2020.