The U.S. Department of Labor’s (“DOL” or the “Department”) final rule clarifying the joint employer standard becomes effective March 16, 2020. The DOL first announced the new rule on January 12, 2020. The DOL’s final rule narrows the definition of joint employment and contains several practical examples illustrating scenarios where joint employer status would or would not exist. The new rule is a positive development for employers, as the DOL’s guidance should assist employers in structuring their relationships with suppliers, contractors, and staffing agencies.
The new rule only applies to the DOL’s interpretation of the Fair Labor Standards Act (“FLSA”), which governs federal minimum wage, overtime, hours worked, and recordkeeping requirements. Under the FLSA, an entity can be considered a “joint employer” if it exercises sufficient control over the terms and conditions of another employer’s workers. The existence of a joint employer relationship is a frequently litigated issue in the FLSA context, as joint employers are jointly and severally liable for FLSA obligations, such as the failure to pay overtime wages.
The DOL has not made any substantive updates to its joint employer rules in over sixty years. Federal courts currently apply several different tests to determine whether two or more entities are joint employers. These inconsistent rulings have made it difficult for many employers to order their business activities to ensure that they are not joint employers. One of the stated purposes of the DOL’s new rule is to provide “clear and straightforward” regulations, in the hope of “encourag[ing] greater consistency for stakeholders.”
The DOL’s Four Factor Test
The DOL’s new rule adopts a four-factor balancing test to determine whether an entity constitutes a joint employer. Specifically, the Department will consider whether a business:
- Hires and fires employees;
- Supervises and controls the employees’ work schedules or conditions of employment to a substantial degree;
- Determines employees’ rate and method of payment; and
- Maintains employment records.
None of these factors is dispositive, and the new rule provides that “whether a person is a joint employer will depend on all the facts in a particular case.”
New Rule Clarifies Which Factors Are Not Relevant
The DOL’s four-factor test is not novel, as it contains several of the joint employment factors currently considered by federal circuit courts. However, the new rule lends significant clarity to the definition of joint employment by identifying numerous factors which the Department states are not relevant to the determination of joint employer status. Several of these “irrelevant” factors contradict current federal precedent.
For example, in Salinas v. Commercial Interiors, Inc., the Fourth Circuit (which encompasses North Carolina, South Carolina, Virginia and Maryland) held that courts should consider the degree of “economic dependence” between the two putative joint employers. The DOL’s new rule explicitly rejects this factor as not relevant to the joint employer analysis.
The Department’s new rule also identifies the following additional factors as either not relevant or insufficient, standing alone, to confer joint employer status:
- Operating as a franchisor: The final rule provides that the use of a franchisor‑franchisee model does not mean that a franchisor is more likely to be the joint employer of its franchisee’s employees.
- Maintenance of an employee’s employment records: The new rule provides that maintenance of employee records, standing alone, will not lead to a finding of joint employer status if no other factors are present.
- Unexercised ability to control an employee’s conditions of employment: Numerous federal courts have held that an entity’s ability to exercise control over another entity’s employees weighs in favor of joint employment status, even if the entity never exercised such control. The new DOL rule expressly provides that such power, ability, or reserved contractual rights are not in themselves sufficient to establish FLSA joint employer status without some actual exercise of control.
- Contractual agreements related to compliance with legal obligations or standards: Employers often enter into contracts with third parties (such as suppliers, contractors, and staffing companies) which require the other entity to comply with applicable laws or health and safety standards. The new rule provides that the maintenance, monitoring, or enforcement of such standards does not make joint employer status more or less likely. The new rule also cites the following examples as factors which are not relevant to the joint employer analysis: agreements mandating compliance with employment laws; agreements requiring background checks; and maintenance and enforcement of health and safety protocols.
- Contractual requirements related to quality control standards: The maintenance and enforcement of quality control standards is one of the most frequently litigated issues in the joint employer context. For example, if Company A contracts with Company B to provide services, at what point does Company A’s enforcement of basic quality control standards against Company B’s employees constitute sufficient control to confer joint employer status? The new rule lends some clarity to this issue by providing that the maintenance and enforcement of quality control standards or agreements, standing alone, does not make joint employer status more or less likely. The new rule also cites the following specific examples of such contractual arrangements: provisions specifying the size or scope of a work project; provisions requiring the contractor to meet quality or quantity standards and deadlines; and provisions requiring the use of standardized products and services.
- Provision of a sample employee handbook.
- Allowing an employer to operate a business on its premises (including “store within a store” arrangements).
- Offering an association health plan or association retirement plan.
According to the new rule, to make joint employer status more likely under the above-referenced scenarios, “the potential joint employer would have to not only provide such resources but would also have to somehow exercise control over the employees in relation to those resources.” Examples of such control include activities such as: directly or indirectly supervising employees on a regular, “substantial” basis; directly or indirectly controlling hiring and firing decisions (such as regularly mandating that a contractor terminate selected employees); or regularly assigning employees specific tasks or providing them with hands-on instruction.
New Rule Provides Several “Illustrative Examples”
The new joint employer rule provides several practical examples illustrating the application of the four-factor test. These hypothetical scenarios provide employers with guidance that should assist them in structuring their relationships with third parties.
Although a description of the DOL’s illustrative examples is beyond the scope of this article, the hypotheticals related to quality control standards (the fourth and fifth examples) should be particularly useful for employers, as these scenarios mirror the type of fact patterns that employers frequently encounter when dealing with contracted services.
It is important to note that the impact of the new rule remains to be determined. Effective March 16, 2020, the new rule establishes how the DOL will determine joint employment status in its own FLSA investigations and enforcement actions. The new rule is not applicable to the joint employer tests used under other federal statutes, such as Title VII or the National Labor Relations Act.
In addition, although federal courts typically look to agency interpretations for guidance, the new rule does not constitute binding authority for federal courts. Similarly, the new rule does not alter interpretations of joint employer status under state wage and hour laws.
Nonetheless, the DOL’s final rule should be viewed as a step in the right direction for employers. Prior agency interpretations and federal case law on the joint employment issue have often left employers with more questions than answers. The DOL’s new rule simplifies and narrows the scope of the joint employment inquiry, which should make it easier for companies to model their behavior to ensure compliance with the FLSA. Companies that exercise any degree of control or supervision over another company’s employees are encouraged to consult with counsel regarding the impact of the new DOL rule.
For more information or assistance complying with the FLSA, please contact our Labor & Employment Practice.
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