On January 12, 2020, the Department of Labor (“DOL”) issued its much-anticipated Final Rule updating its test for deciding when two different entities will be considered a joint employer and therefore may be jointly liable for wage and hour violations under the Fair Labor Standards Act (“FLSA”). The effective date of the Final Rule is March 16, 2020.
The Final Rule adopts a four-factor test for determining joint employment when a worker has one employer (e.g., a staffing agency), but a second potential joint employer benefits from the worker’s work (e.g., the client-business where the worker is assigned). The four factors are whether the potential joint employer (i) can hire or fire the employee; (ii) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; (iii) determines the employee’s method and rate of pay; and (iv) maintains the employee’s employment records. No single factor is dispositive, according to the Final Rule; rather, the appropriate weight given to each factor will vary depending on the circumstances.
Like the test that preceded it, much of the commentary in the rulemaking process focused on the control factor and how it is to be weighed. The Final Rule, in addition to emphasizing that actual control and not the mere ability to control is the key consideration, includes a number of helpful examples analyzing this question. The following are three examples included in the Final Rule followed by the DOL’s analysis:
Example. A restaurant contracts with a cleaning company to provide cleaning services. The contract does not give the restaurant authority to hire or fire the cleaning company’s employees or to supervise their work on the restaurant’s premises. However, in practice a restaurant official oversees the work of employees of the cleaning company by assigning them specific tasks throughout each day, providing them with hands-on instructions, and keeping records tracking the work hours of each employee. On several occasions, the restaurant requested that the cleaning company hire or terminate individual workers, and the cleaning company agreed without question each time. Is the restaurant a joint employer of the cleaning company’s employees?
Application. Under these facts, the restaurant is a joint employer of the cleaning company’s employees because the restaurant exercises sufficient control, both direct and indirect, over the terms and conditions of their employment. The restaurant directly supervises the cleaning company’s employees’ work on a regular basis and keeps employment records. And the cleaning company’s repeated and unquestioned acquiescence to the restaurant’s hiring and firing requests indicates that the restaurant exercised indirect control over the cleaning company’s hiring and firing decisions.
Example. A restaurant contracts with a cleaning company to provide cleaning services. The contract does not give the restaurant authority to hire or fire the cleaning company’s employees or to supervise their work on the restaurant’s premises. A restaurant official provides general instructions to the team leader from the cleaning company regarding the tasks that need to be completed each workday, monitors the performance of the company’s work, and keeps records tracking the cleaning company’s completed assignments. The team leader from the cleaning company provides detailed supervision. At the restaurant’s request, the cleaning company decides to terminate an individual worker for failure to follow the restaurant’s instructions regarding customer safety. Is the restaurant a joint employer of the cleaning company’s employees?
Application. Under these facts, the restaurant is not a joint employer of the cleaning company’s employees because the restaurant does not exercise significant direct or indirect control over the terms and conditions of their employment. The restaurant’s daily instructions and monitoring of the cleaning work is limited and does not demonstrate that the restaurant is a joint employer. Records of the cleaning team’s work are not employment records under paragraph (a)(1)(iv) of this section, and therefore, are not relevant in determining joint employer status. While the restaurant requested the termination of a cleaning company employee for not following safety instructions, the decision to terminate was made voluntarily by the cleaning company and therefore is not indicative of indirect control.
Example. A packaging company requests workers on a daily basis from a staffing agency. Although the staffing agency determines each worker’s hourly rate of pay, the packaging company closely supervises their work, providing hands-on instruction on a regular and routine basis. The packaging company also uses sophisticated analysis of expected customer demand to continuously adjust the number of workers it requests and the specific hours for each worker, sending workers home depending on workload. Is the packaging company a joint employer of the staffing agency’s employees?
Application. Under these facts, the packaging company is a joint employer of the staffing agency’s employees because it exercises sufficient control over their terms and conditions of employment by closely supervising their work and controlling their work schedules.
Lastly, the Final Rule identifies certain common business practices that are often present when one employer provides workers to a potential joint employer that do not make joint employment more or less likely on their face: (i) the existence of a franchisor-franchisee business relationship or model; (ii) a contractual agreement between the employer and the potential joint employer (e.g., an MSA) requiring the worker to comply with the legal obligations of the potential joint employer, including health and safety standards and quality control standards; (iii) a contractual agreement between the employer and the potential joint employer (e.g., an MSA) mandating that the employer comply with its obligations under the FLSA, or institute sexual harassment policies, or require background checks, or require the employer to establish workplace safety practices and to provide workers training regarding matters such as health, safety, or legal compliance; and (iv) requiring the employer to include certain particular policies, standards and procedures in an employee handbook.
The Bottom Line for Employers
If two business are found to be joint employers under the FLSA, they share responsibility for ensuring that workers are properly and lawfully paid under the FLSA and share liability when the requirements of the FLSA are not met. As many businesses have learned, often the hard way, being a joint employer carries with it substantial and expensive legal risk. Thus the clarification provided by the Final Rule should be a welcome development on a number of levels. Although it is unclear exactly how this will play out in the courts, which retain some discretion in whether to follow an arguably interpretive rule like this one, it does provide guidance on how the DOL’s in-house investigators will approach the issue. And, on a practical level, it clarifies that some of the practices typically present in potential joint employer relationships, (such as enacting sexual harassment policies, requiring background checks, and compliance with drug and alcohol testing rules), will not be dispositive of the joint employer question. Finally, this DOL-endorsed framework makes it more likely that the courts will coalesce around a common framework for analysis, meaning more certainty for employers.
Final Note: The Final Rule has no effect on the joint employer analysis adopted by other agencies, like the NLRB or the EEOC. Further, the Final Rule is only applicable to joint employer questions under the FLSA, and does not extend to other statutes overseen by the DOL, like OSHA.