Wage and Hour Division Broadly Redefines Joint Employment

The U.S. Department of Labor Wage and Hour Division (WHD) announced a new standard to hold employers jointly liable under the Fair Labor Standards Act (FLSA).  See Administrator’s Interpretation No. 2016-1 (Jan. 20, 2016). The WHD targets construction, agricultural, janitorial, warehouse and logistics, staffing, and hospitality industries, and seeks to answer questions such as whether “a construction worker who works for a subcontractor is also employed by the general contractor.” This guidance signals a sharp trend towards extensive enforcement against alleged joint employers.

The “joint employment” issue has weighty implications. Under the FLSA, all of an employee’s hours worked for all joint employers must be aggregated and considered as one employment for overtime purposes. Each employer is individually responsible for the amount of wages due to a “jointly employed” employee. If one employer cannot pay the wages because of bankruptcy or other reasons, the other employer must pay the entire amount of wages. The law does not assign a proportional amount to each employer.

The WHD distinguishes for the first time “horizontal” and “vertical” joint employment. Horizontal joint employment exists where two or more employers “are sufficiently associated or related with respect to the employee such that they jointly employ the employee.” The WHD identifies the factors currently listed in the FLSA regulations for the horizontal test.

While the WHD’s guidance on the “horizontal” factors is typical, the WHD’s guidance on “vertical” joint employment is novel. The WHD departs from the FLSA regulations and uses an “economic realities” test for vertical joint employment. The vertical joint employment situation arises where the employee has an employment relationship with one employer (typically a staffing agency, subcontractor, labor provider, or other intermediary employer) and the economic realities show the employee is economically dependent on the potential joint employer.

According to the WHD, the critical first step in the vertical joint employment inquiry is whether the intermediary employer is an employee of the potential joint employer. If so, all of the intermediary employer’s employees are employees of the potential joint employer and there is no need for further analysis. WHD provides the example: “If a drywall subcontractor is not actually an independent contractor but is an employee of the higher-tier contractor, then all of the drywall subcontractor’s workers are also employees of the higher-tier subcontractor.” We find the WHD’s guidance that an entity could be the employer of another entity overreaching and subject to judicial attack.

If it is determined that the intermediary is not an employee of the potential joint employee, the “vertical” analysis moves forward with evaluation of “economic realities” factors. The WHD relies on factors listed in the Migrant and Seasonal Agricultural Worker Protection Act (MSPA) for its “vertical” analysis under the FLSA. The seven factors are as follows:

1. 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 and still be sufficient to indicate economic dependence by the employee. 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.

2. 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. 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.

3. 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 is considered in the context of the industry (e.g., seasonal, intermittent, part-time).

4. 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, and/or requires little or no training, those facts indicate that the employee is economically dependent on the potential joint employer.

5. 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.

6. 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.

7. 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.

The WHD is not shy about its intent to scrutinize targeted industries to extend joint employment liabilities to those businesses with the ability to pay. The WHD explains, “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.”

This WHD guidance comes amidst a flurry of government agency activity aimed at broadening the scope of joint employment liability. While the agencies have broad powers to interpret their respective regulations, agency action is subject to judicial review. As government agencies get more creative in interpreting joint employment, we expect to see more challenges to enforcement pursued in the courts.

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