DOL's Expanded Joint Employer Standard: You may have more employees than you think

In today’s workplaces, it is not uncommon to find businesses sharing employees or utilizing employees from third-party management companies, staffing agencies, independent contractors, or labor providers.  These employment arrangements are most often found in the construction, agricultural, janitorial, warehouse/logistics, staffing, and hospitality industries.  At Dickinson, we also have seen joint employment used by our manufacturing clients, in particular for temp-to-hire workers, and in small businesses who are leasing employees or using professional employer organizations (PEO’s).  This practice is generally known as joint employment.  And when it exists, the multiple employers are jointly and severally liable for compliance with the Fair Labor Standards Act (FLSA).

Continuing a trend that included DOL’s 2015 Administrator’s Interpretation (AI) on independent contractors , in January 2016 the Wage and Hour Division (WHD) issued another AI titled, “Joint Employment Under the Fair Labor Standards Act and Migrant and Seasonal Worker Protection Act.” The theme in both guidance documents is one of expanded DOL enforcement authority.  WHD’s interest in finding joint employment is shown in this statement from the Joint Employment AI: “One employer may also be larger and more established, with a greater ability to implement policy or systemic changes to ensure compliance.  Thus, WHD may consider joint employment to achieve statutory coverage, financial recovery of back wages due and future compliance.”

In the Joint Employment AI, WHD endorses a concept that Administrator Dr. David Weil has been espousing for some time—that of “vertical joint employment.”  Before examining this, let’s take a look at both types of joint employment, as explained in the new AI.

Horizontal Joint Employment

The common and long-recognized type of joint employment, now known as horizontal joint employment, exists when two or more employers each separately employ the same worker and the employers are sufficiently associated with each other with respect to the employee that both may be considered his or her employer.  In a horizontal joint employment situation, there is typically an established employment relationship between the employee and each of the employers, and often the employee performs separate work or works separate hours for each of the employers.  The focus of a horizontal joint employment analysis is the relationship between multiple employers, vis-a-vis the employee. 

Factors to be considered when determining horizontal joint employment include (1) overlap in ownership, (2) overlap in management or directors and officers, (3) shared control over operations (such as hiring, firing, payroll, advertising, overhead), (4) inter-mingling of operations (such as shared scheduling or administration), (5) supervision of work done for one employer by the other, (6) shared supervision of the employee by both employers, (7) whether employees are treated as a pool of workers shared by the employers, (8) whether the employers share clients/customers, and (9)  agreements that may exist between the employers.  No one of these factors is controlling and not all or even most of these nine factors need to be present for the WHD to find the existence of horizontal joint employment. 

Examples of horizontal joint employment include an employee who works for two separate restaurants, when those restaurants share economic ties and have the same managers controlling both restaurants.  Another example is home health care providers who work for two separate agencies, but those agencies share staff back and forth and have common management.   

Vertical Joint Employment

Vertical joint employment exists where employers have contracted with each other to obtain labor or perform hiring or payroll functions, and the work performed by a particular employee benefits each employer.  Here, the employee has an employment relationship with one employer (typically a staffing agency, subcontractor, labor provider, or other ‘intermediary employer’) but the economic realities show that he or she is economically dependent on another entity involved in the work.  The employer who typically contracts with the intermediary employer to utilize the employee’s labor is called the ‘potential joint employer’ in the AI.  A common example of vertical joint employment is a construction worker who works for a subcontractor and is considered jointly employed by the general contractor, because the subcontractor works exclusively, or nearly, so for the general.

Traditionally, the amount of control over the employee that was exercised by the potential joint employer was a major factor in determining whether a generic joint employment relationship existed.   This type of control test has also been used to determine joint employment under other statutes, such as the National Labor Relations Act and the Occupational Safety and Health Act.  But now, Dr. Weil and the WHD are putting forth a vertical joint employment analysis under the FLSA that is much broader than the traditional approach.   As revealed in the AI language, WHD now rejects control as a primary test for determining joint employment and replaces it with the economic realities test.   As a result, any vertical joint employment analysis must now primarily determine if the employee is economically dependent on the potential joint employer.

Result of Joint Employment

WHD indicates that a single employee may be involved in both horizontal and vertical joint employment relationships in today’s complex employment world.   When joint employment is established, the employee’s hours worked for both employers are added together and considered as one employment for purposes of determining when overtime is due.  Moreover, both employers are jointly and severally liable for the total amount of wages due to the employee, even if contracts between them say otherwise.

Likely Impact of this AI

WHD is now poised to apply this expanded joint-employer standard.  The AI gives WHD staff official guidance on which they can rely to enforce both joint employer standards.  In addition, WHD’s pronouncement draws attention to the issue that joint employers are jointly and severally liable for compliance with the FLSA.  That may encourage plaintiffs’ lawyers and their clients to use the AI to claim that even questionably-related businesses are joint employers who both and jointly owe back wages and damages under the FLSA.   In other words, if one of the joint employers is unable to pay the wages due, the WHD and the employee can collect from the other joint employers.  

What You Can Do

Any business that uses or shares a third-party’s workers should review the Joint Employment AI and consider carefully how the WHD and courts will view their business relationships.  A business that fails to understand its joint employment responsibility may face unanticipated exposure under the FLSA, including liability for failure to pay the minimum wage or overtime pay for workers not previously considered its employees, or violation of the FLSA’s recordkeeping requirements.  

Attorney Note: While businesses cannot shift this liability by contract, carefully crafted indemnity provisions may be used to accomplish a similar result.

For more information on joint employment, please contact Mike Staebell.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.