Labor Department takes aim at potential ‘joint employers’

The U.S. Department of Labor’s Wage & Hour Division recently issued a controversial new Administrator’s Interpretation detailing the division’s views on “joint employment” under the federal Fair Labor Standards Act and Migrant and Seasonal Agricultural Worker Protection Act.

Notably, in this formal guidance, the Wage & Hour Division — or WHD — indicates an intention to expand the joint employment doctrine well beyond its traditional boundaries, as delineated in the current FLSA regulations.

This expansion, if adopted by courts, could carry expensive repercussions for many employers.

Background and overview

In general, under the FLSA, Migrant and Seasonal Agricultural Worker Protection Act and similar statutes, separate businesses may be found to be joint employers of a worker if they bear a significant connection to one another in relation to the worker’s services.

A finding of joint employer status can have major consequences for a business. In particular, when an employee is jointly employed by two or more employers, all of the hours worked by the employee for the joint employers during a workweek are aggregated for purposes of determining entitlement to overtime pay.

Similarly, if an employer fails to pay an employee in accordance with minimum wage requirements, a joint employer of the employee may be held liable for the resulting damages.

According to the WHD, the Administrator’s Interpretation was issued due to an increasing proliferation of business models involving potential joint employment relationships, particularly in the construction, agricultural, janitorial, warehouse and logistics, staffing and hospitality industries.

Thus, employers in those industries, in particular, should give close attention to the issues raised by the new guidance, as it appears that the DOL may have such employers in its crosshairs.

Horizontal joint employment

In the Administrator’s Interpretation, the WHD explicitly differentiates between so-called “horizontal” and “vertical” joint employment relationships.

While the WHD’s delineation of horizontal joint employment standards adheres to established legal principles, its intended standard for evaluating potential vertical joint employment relationships represents a significant change from existing law.

As the WHD’s guidance notes, horizontal joint employment characterizes a scenario in which two or more employers (i) separately employ an employee and (ii) bear a significant connection to one another in relation to the employee.

For example, an employee might simultaneously work for two restaurants that are owned and managed by the same persons. In such situations, the businesses may be found to be horizontal joint employers.

The Administrator’s Interpretation indicates that potential horizontal joint employment relationships will be assessed under the existing standards for joint employment set forth in the FLSA regulations. Under those standards, relevant factors include, among others:

• The ownership structures of the potential joint employers (e.g., whether one business owns all or part of another, or whether the businesses have common owners);

• Whether the potential joint employers have overlapping officers, directors, executives or managers;

• The extent to which the businesses’ operations (e.g., hiring, firing, scheduling, payroll, advertising) are intermingled or commonly controlled;

• Whether the businesses share a “pool” of employees who are, effectively, available to each of them;

• The degree to which supervisory authority over the businesses’ respective workers is shared;

• The extent to which the businesses have clients or customers in common; and

• Any agreements (e.g., management agreements) between the potential joint employers.

Of course, by itself, the fact that an employee works for multiple employers will not result in a finding of horizontal joint employment status, if the employers act independently of each other with respect to the employee.

For example, two retail stores might simultaneously employ an individual on a part-time basis without being deemed joint employers, provided that the stores are not associated with each other in relation to the individual’s employment.

Vertical joint employment

By contrast, vertical joint employment typically arises when an individual is directly employed by a business that serves as an “intermediary” for another organization that ultimately benefits from the individual’s services.

A common example is an employer’s obtaining workers through a temporary staffing agency. The focus of the vertical joint employer analysis is the relationship between the workers and the potential joint employer, as opposed to horizontal joint employment’s focus on the connections between the separate businesses.

It is in this area that the Administrator’s Interpretation explicitly and dramatically departs from existing legal standards. Specifically, the WHD take the position that potential vertical joint employment relationships should be evaluated from an “economic realities” perspective — in other words, if a worker is economically dependent on a potential joint employer, then a joint employment relationship is likely to be found to exist.

Notably, the WHD’s new “economic realities” standard for vertical joint employment is not derived from the language of the FLSA or Migrant and Seasonal Agricultural Worker Protection Act (or MSPA).

Further, while the MSPA regulations cite a number of “economic reality” factors as bearing on joint employment analyses, those factors do not appear in the FLSA regulations.

Instead, the FLSA regulations incorporate a narrower standard, under which joint employment may be found when (i) there is an arrangement between the employers to share an employee’s services; (ii) one employer is acting, directly or indirectly, in the interest of the other employer in relation to the employee; or (iii) the employers are not completely disassociated with respect to the employee and are commonly controlled in some respect.

Nonetheless, with regard to FLSA as well as MSPA compliance, the Administrator’s Interpretation instructs employers to assess potential vertical joint relationships under this new “economic realities” standard, with reference to the specific factors set forth in the MSPA regulations. Those factors include:

• Which business controls an individual’s day-to-day services and/or his or her terms and conditions of employment;

• Whether the work relationship is temporary or indefinite (according to the WHD, an indefinite relationship suggests that the worker is economically dependent upon the putative joint employer);

• Whether the work is rote or repetitive (in the WHD’s view, employees performing such work are more likely to be economically dependent upon the business for whose benefit the services are performed);

• Whether the work is integral to the potential joint employer’s business and/or is performed on its premises (such factors, as well, tend to suggest that the “economic realities” standard is met);

• The extent to which the potential joint employer performs employment-related functions with regard to a worker (e.g., handling payroll, providing workers’ compensation insurance, and supplying tools and equipment).

Opposition by employer groups

Employer groups have reacted strongly to the WHD’s efforts to expand the joint employment doctrine through its recent Administrator’s Interpretation.

For instance, organizations such as the National Council of Chain Restaurants and the National Retail Federation have charged that adoption of this broadened standard would substantially and unfairly increase businesses’ exposure to potential wage claims by employees of subcontractors or franchisees.

Additionally, the Administrator’s Interpretation might well be viewed as a sub rosa attempt by the WHD to amend the current FLSA regulations with regard to joint employment standards.

If so, the new guidance may be vulnerable to a legal challenge, as the WHD did not provide a notice-and-comment period before issuing the Administrator’s Interpretation, as is required when a federal agency seeks to amend its regulations.

Recommendations for employers

Employers would be well-advised to review the Administrator’s Interpretation carefully, in consultation with experienced employment counsel.

While it remains to be seen whether courts will uphold the WHD’s effort to expand the joint employment doctrine in this manner, employers should nonetheless consider whether any aspects of their operations might be revised to minimize potential exposure.

In addition, given the possibility of court challenges to the WHD’s new standard, employers should stay alert for further developments in this area.

Brian D. Carlson and Soyoung Yoon are attorneys at Schwartz Hannum in Andover, Massachusetts, which represents management in labor and employment law matters.