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Employment Law

DOL Shrinks Joint Employer Liability

Feb. 4, 2020
New rule limits situations where such status exists under wage and hour laws.

The U.S. Department of Labor (DOL) has adopted a final rule that reduces the likelihood that an employer can be defined as a joint employer under the Fair Labor Standards Act. (FLSA) wage and hour regulations.

The new rule, which goes into effect on March 16, was first proposed by the DOL Wage and Hour Division last April. The final rule adopts the proposed four-factor test to determine whether an employing entity would be considered a joint employer under the FLSA. However, it also modifies the language in such a way that makes a finding of “joint employer” status less likely to occur.

Although the Occupational Safety and Health Administration has long recognized joint employer status for leasing firms when it comes to safety enforcement liability, other federal regulatory bodies and the courts have found themselves embroiled in the controversy in recent years when it comes to application of different federal employment laws.

Before the DOL final rule was issued, the FLSA’s joint-employer standard had not been substantively adjusted in more than 60 years. However, it remains a hot-button issue for policymakers due to an ongoing attempt by labor unions to expand the status for employees, who then would be easier to organize if employers are required to be seen as joint employers to franchisees, independent contractors and staff leasing firms.

The National Labor Relations Board is expected to release a joint employer final rule this year, and the Equal Employment Opportunity Commission plans to release a proposed rule tackling the issue in the near future as well.

An indication of where the NLRB is heading surfaced last December when the board ordered an administrative law judge to recognize that the board is in agreement that McDonald’s legal argument that it is not a joint employer and therefore should not be held liable for its franchisees’ labor practices. That action is considered a major victory for franchisors of all stripes, and blunts a long-term campaign by unions to organize employees in the hamburger chain’s franchises under the theory of joint liability.

Employers need to keep in mind that a number of states have taken steps to establish their own joint-employment wage and hour laws and regulations granting joint employer status that need to be adhered to even when in situations where they may differ from federal standards.

In regard to its own joint employer final rule, DOL asserts that the changes will add certainty regarding what business practices may lead to the granting of joint employer status. It also says the rule “promotes greater uniformity among court decisions by providing a clearer interpretation of FLSA joint employer status. These benefits will in turn improve employers’ ability to remain in compliance with the FLSA and will help reduce litigation costs.”

Labor Secretary Eugene Scalia commented, “The changes in this final rule break down barriers that keep companies from constructively overseeing, guiding and helping their business partners. For small business owners, and the employees working in those businesses, the relationship and the guidance coming from franchisors and other contracting companies can greatly improve the workplace and help them create jobs.”

Wage and Hour Division Administrator Cheryl Stanton added, “This final rule furthers President Trump’s successful, government-wide effort to address regulations that hinder the American economy and to promote economic growth. By giving greater clarity to businesses who want to work together, we promote an entrepreneurial culture that has driven American prosperity for decades.”

DOL’s Relevant Factors

Under the rule, an employer will be found to be a joint employer if it:

• Hires or fires the employee.

• Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree.

• Determines the employee’s rate and method of payment.

• Maintains the employee’s employment records.

DOL explains that “no single factor is dispositive in determining joint employer status, and the appropriate weight to give each factor will vary depending on the circumstances.”

In addition, the final rule identifies factors that DOL does not deem to be relevant to determining FLSA joint employer status. For example, it is not considered relevant that an employee is economically dependent on the potential joint employer. Also excluded are factors traditionally used to establish if a particular worker is a bona fide independent contractor, such as the worker’s opportunity for profit or loss, their investment in equipment and materials, and similar determinations.

The final rule narrows the definition of “indirect control,” which was said to exist when the potential joint employer issues mandatory directions to another employer that directly controls the employee. (This has been a problem with the Obama-era NLRB’s determination of joint employer status when there is only the possibility control might be exerted by the originating employers).

DOL also states that after the rule goes into effect, the direct employer’s voluntary decision to grant the alleged joint employer’s request, recommendation or suggestion will not constitute indirect control that can demonstrate joint employer status.

The final rule also identifies certain other factors that the department says will not make a joint employer status finding any more or less likely under the FLSA, including:

• Operating as a franchisor or entering into a brand and supply agreement or using a similar business model.

• The potential joint employer’s contractual agreements with the employer requiring the employer to comply with its legal obligations or to meet certain standards to protect the health or safety of its employees or the public

• The potential joint employer’s contractual agreements with the employer requiring quality control standards to ensure the consistent quality of the work product, brand, or business reputation.

• The potential joint employer’s practice of providing the employer with a sample employee handbook, or other forms, allowing the employer to operate a business on its premises (including “store within a store” arrangements), offering an association health plan or association retirement plan to the employer or participating in such a plan with the employer, jointly participating in an apprenticeship program with the employer, or any other similar business practice.

The department also added a definition of “employment records” that had not been included in the proposed regulations. Under the new definition, they are said to be records, such as payroll records, that reflect, relate to or otherwise record information pertaining to the hiring or firing, supervision and control of the work schedules or conditions of employment, or determining the rate and method of payment of the employee.

“Satisfaction of the maintenance of employment records factor alone will not lead to a finding of joint employer status,” DOL stressed.

The text of the final rule published in the Federal Register goes so far as to provide several examples specifying how the department’s joint employer guidance should be applied in a wide variety of different factual circumstances.

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