On January 20, 2016, the U.S. Department of Labor’s Wage and Hour Division (WHD) issued an Administrator’s Interpretation (AI) on joint employment under the Fair Labor Standards Act (FLSA) and Migrant Seasonal Agricultural Worker Protection Act (MSPA). This sub-regulatory guidance largely reflects existing WHD policy. However, it confirms how broad the DOL’s view of the concept of joint employment is, and it signals that the DOL will aggressively enforce the FLSA and MSPA against those it believes to be joint employers.
The AI begins by advising the regulated community that joint employment relationships under the FLSA and MSPA “should be defined expansively.” The AI explains the FLSA and MSPA share the same broad definition of employment and this definition, which includes “to suffer or permit to work,” was written to have as broad an application as possible. Indeed, the AI notes the concept of joint employment under these statutes is broader than the common-law concepts, which look primarily to the amount of control that a potential employer exercises over an employee.
The AI states that WHD will consider the prospect of joint employment in FLSA and MSPA cases where (1) the employee works for two employers who are associated or related in some way with respect to the employee; or (2) the employee’s employer is an intermediary or otherwise provides labor to another employer.
The AI describes these two types of joint employment as “horizontal” and “vertical,” respectively, and provides guidance for the assessment of each type.
Horizontal Joint Employment
The AI explains that horizontal joint employment may exist when two (or more) employers each separately employ an employee and are sufficiently associated with or related to each other with respect to the employee.
In horizontal joint employment situations, 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. As an example of horizontal joint employment, the AI discusses a waitress who works for two restaurants; although the restaurants may be separate entities, they could be joint employers of the waitress if, for example, they share economic ties and have the same managers controlling both restaurants.
In order to analyze whether horizontal joint employment may exist, WHD will apply its current joint-employment regulations and examine factors such as:
- who owns the potential joint employers (i.e., does one employer own part or all of the other or do they have any common owners);
- whether the potential joint employers have any overlapping officers, directors, executives, or managers;
- whether the potential joint employers share control over operations (e.g., hiring, firing, payroll, advertising, and overhead costs);
- whether the potential joint employers’ operations are intermingled (for example, whether there is one administrative operation for both employers, or whether the same person schedules and pays the employees regardless of which employer they work for);
- whether one potential joint employer supervises the work of the other;
- whether the potential joint employers share supervisory authority for the employee;
- whether the potential joint employers treat the employees as a pool of employees available to both of them;
- whether the potential joint employers share clients or customers; and
- whether there any agreements between the potential joint employers.
In cases where horizontal joint employment is established, the employee’s work for the joint employers during the workweek “is considered as one employment,” and the joint employers are jointly and severally liable for compliance, including paying overtime compensation for all hours worked over 40 during the workweek.
This can create a trap for unwary employers. For example, consider WHD’s hypothetical waitress who works for two restaurants. If during a particular workweek, the waitress works 25 hours for one restaurant and 25 hours for the other, both restaurants may be paying the waitress 25 hours of straight-time pay each, believing that she is not owed any overtime premiums from either restaurant. However, if the restaurants are later found to be her joint employers, then the restaurants would be jointly liable for 10 hours of overtime premiums, given that the waitress worked a total of 50 hours during this workweek.
Vertical Joint Employment
Vertical joint employment, the AI explains, may exist when an employee of one employer, referred to in the AI as an “intermediary employer,” is also, with regard to the work performed for the intermediary employer, economically dependent on another employer, referred to in the AI as a “potential joint employer.”
Under the AI, in vertical joint employment situations, the potential employer typically has contracted or arranged with the intermediary employer to provide it with labor or perform some of its employer functions, such as hiring or payroll. There is typically an established employment relationship between the employee and the intermediary employer; however, the employee’s work is typically also for the benefit of the potential employer.
The AI provides an example of a construction worker who works for a subcontractor and is also jointly employed by the general contractor. Another example is a business that contracts with a staffing company to provide it with temporary labor; depending on the circumstances, that business may be a joint employer of the employees supplied to it by the staffing company.
As a threshold matter, the AI instructs that the question of whether the intermediary employer is actually an employee of the potential employer must be resolved. If the intermediary employer is an employee of the potential joint employer, then all of the intermediary employer’s employees are employees of the potential joint employer, too, and there is no need to conduct a vertical joint employer analysis. To use one of WHD’s examples above, if a subcontractor is found to be an employee of a general contractor, then the subcontractor’s employees would automatically also be jointly employed by the general contractor, with no further analysis necessary.
If it is determined that the intermediary is not an employee of the potential employer, then the vertical joint employment analysis should proceed. The vertical joint employment analysis is an “economic realities” test. The AI suggests that when conducting a vertical joint-employment analysis, WHD may draw from the seven economic-reality factors described in the MSPA regulation:
- Directing, Controlling, or Supervising the Work Performed. To the extent that the work performed by the employee is controlled or supervised by the potential joint employer beyond a reasonable degree of contract performance oversight, such control suggests that the employee is economically dependent on the potential joint employer. The potential joint employer’s control can be indirect (for example, exercised through the intermediary employer) and still be sufficient to indicate economic dependence by the employee. Additionally, the potential joint employer need not exercise more control than, or the same control as, the intermediary employer to exercise sufficient control to indicate economic dependence by the employee.
- Controlling Employment Conditions. To the extent that the potential joint employer has the power to hire or fire the employee, modify employment conditions, or determine the rate or method of pay, such control indicates that the employee is economically dependent on the potential joint employer. Again, the potential joint employer may exercise such control indirectly and need not exclusively exercise such control for there to be an indication of joint employment.
- Permanency and Duration of Relationship. An indefinite, permanent, full-time, or long-term relationship by the employee with the potential joint employer suggests economic dependence. This factor should be considered in the context of the particular industry at issue.
- Repetitive and Rote Nature of Work. To the extent that the employee’s work for the potential joint employer is repetitive and rote, is relatively unskilled, or requires little or no training, those facts indicate that the employee is economically dependent on the potential joint employer.
- Integral to Business. If the employee’s work is an integral part of the potential joint employer’s business, that fact indicates that the employee is economically dependent on the potential joint employer.
- Work Performed on Premises. The employee’s performance of the work on premises owned or controlled by the potential joint employer indicates that the employee is economically dependent on the potential joint employer. The potential joint employer’s leasing as opposed to owning the premises where the work is performed is immaterial because the potential joint employer, as the lessee, controls the premises.
- Performing Administrative Functions Commonly Performed by Employers. To the extent that the potential joint employer performs administrative functions for the employee, such as handling payroll, providing workers’ compensation insurance, providing necessary facilities and safety equipment, housing, or transportation, or providing tools and materials required for the work, those facts indicate economic dependence by the employee on the potential joint employer.
Courts have relied on similar factors when analyzing possible vertical joint employment scenarios in FLSA cases, though they have not explicitly relied on the MSPA regulation. Although the economic realities factors that may be employed by a court will vary from jurisdiction to jurisdiction, any formulation must address the “ultimate inquiry” of economic dependence.
Again, this concept of “vertical” joint employment creates traps for unwary employers. For example, many businesses contract with staffing companies to provide them with temporary labor, often believing that this insulates them from liability to the staffing company’s employees. Under WHD’s interpretation, such businesses may be held jointly liable for wage violations regarding those employees, in some cases even where the staffing company handled the employees’ pay. Further, as a practical matter, if the staffing company becomes unable to satisfy any judgment for unpaid wages, then the business contracting with the staffing company could effectively become liable for all of the unpaid wages.
WHD’s Clear Attack on the “Fissured” Workplace
In recent years, WHD has stated that one of its priorities is protecting workers in what it has termed “fissured” workplaces, where more than one business is involved in the work being performed. In its AI, WHD has now been quite candid that it seeks to expand statutory coverage of the FLSA and MSPA to hold larger businesses responsible for violations made by smaller business partners:
Where joint employment exists, 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, and future compliance, and to hold all responsible parties accountable for their legal obligations.
There is no question that WHD will continue to interpret the FLSA and MSPA definition of “employ” broadly to ensure employees are protected and that businesses and individuals will not be able to circumvent the requirements of these statutes by setting up separate corporations (horizontal joint employment) or hiring contractors or staffing companies (vertical joint employment). Joint employers, whether horizontal or vertical, will be held responsible, both individually and jointly, for compliance with the FLSA and MSPA.
Going forward, employers should expect to see a trend of WHD charging a greater number of companies with violations under a theory of joint employment. The AI makes specific mention of employers in the construction, agricultural, janitorial, warehouse and logistics, staffing, and hospitality industries, while also stating that it has encountered “fissured” employment scenarios in all industries. Given this, as well as the National Labor Relations Board’s recently expanded standard for determining joint employer status under the National Labor Relations Act (see our article, Labor Board Sets New Standard for Determining Joint Employer Status), all employers should review their business-to-business relationships and practices to assess and minimize their risks in this area.
Jackson Lewis attorneys in the Wage and Hour Practice Group are available to answer inquiries regarding WHD’s new guidance and any other wage and hour issues.