The Department of Labor’s Recent Joint Employer Interpretation Seeks to Hold More Employers, Whether Payroll Companies or Worksite Sites Controlled by Third Parties More Accountable
The U.S. Department of Labor (DOL) issued a new Administrator’s Interpretation (AI) that emphasizes the agency’s intent to apply joint employer status more broadly under the Fair Labor Standards Act (FLSA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA). Even though the definition of joint employment under these acts has not changed, the DOL made it clear that it will examine dual employer relationships closely with what appears to be an intent to find joint employer status in more circumstances.
Of course, companies engaged as a “dual employer” generally seek to avoid joint employer status. Being a joint employer in the eyes of the DOL can result in liability for the acts of a client that has the primary responsibility to direct and control employees. This is not a favorable place to be. Temporary staffing agencies and PEOs do not have enough control over workers assigned to a client location to assume such liability. As a result, such companies have worked for years to maintain dual or co-employment relationships that do not constitute joint employment. It appears, however, that the DOL, through the AI, is trying to chip away at such relationships and include more dual employers within the definition of joint employer.
II. Dual Employers Are Subject to More Intense Scrutiny
All companies engaged in the business of providing employees to clients or co-employing workers are affected by this AI. As explained in more detail below, it is clear that the DOL intends to scrutinize all “dual employer” relationships more closely and focus on the degree of control over workers as a guide to determine whether a joint employer relationship exists.
The DOL identified the two most likely scenarios where joint employment typically exists.
1. One type of joint employment, referred to as vertical joint employment, is where there is an “intermediary employer”, such as a staffing agency, PEO, or other provider of workers to a client. Where such a relationship exists, the DOL will focus on the economic realities of the relationship to determine whether a worker is economically dependent on two or more employers, and if so, will be inclined to find joint employer status.
2. The second type of joint employment under scrutiny by the DOL is where the employee has two or more separate, but related employers, each benefitting from a person’s work during the same period of time. These scenarios are explained in more detail below.
III. Vertical Joint Employment
In a vertical employment relationship, it is common for the “intermediary employer” to be the W-2 employer that actually pays the wages and payroll taxes, but does not direct and control the day-to-day activities of the worker. The issue for the DOL as expressed in the AI is whether, based on the economic realities of the employment relationship shared by the intermediary and the client company, joint employment exists between the employee, the intermediary employer and the client at which the employee is assigned to work.
The economic realities test is not new to the FLSA or MSPA. What is new is that in reviewing a relationship for joint employer status, the DOL announced in the AI that it will abandon its prior practice to look only to its joint employer regulations, and focus exclusively on the economic realities factors in vertical employment scenarios. This is not necessarily bad news, but it is significant.
Under the economic realities test, the degree of control exerted by a person or entity over the workers is only one of the primary factors in a joint employer analysis, and is not definitive. Other economic reality factors the DOL will consider “in the mix” include:
• Does the other employer direct, control, or supervise (even indirectly) the work?
• Does the other employer have the power (even indirectly) to hire or fire the employee, change employment conditions, or determine the rate and method of pay?
• Is the relationship between the employee and the other employer permanent or long-standing?
• Is the employee’s work integral to the other employer’s business?
• Is the work performed on the other employer’s premises?
• Does the employer perform functions typically performed by employers, such as handling payroll, providing workers’ compensation insurance, tools, or equipment, or in agriculture, providing housing or transportation?
• Does the employee perform repetitive work or work requiring little skill?
The DOL also identified industries where it believes vertical joint employment relationships are common, and as a result, under increased scrutiny. These industries include “agriculture, construction, hotels, warehouse and logistics” as well as other industries that regularly use staffing agencies or subcontracting intermediaries.
IV. Horizontal Joint Employment
According to the DOL, the so-called horizontal joint employment relationship exists where multiple employers who are sufficiently associated with each other both benefit from the individual’s work, such as where two separate restaurants have the same ownership and jointly schedule an employee to work at both establishments. The factors to consider when analyzing this type of joint employment include:
• Who owns or operates the possible joint employers?
• Do they have any agreements between the employers?
• Do the two employers share control over operations?
• Do the employers share or have overlapping officers, directors, executives, or managers?
• Does one employer supervise the work of the other?
• Do the employers share supervisory authority over the employee?
• Are their operations co-mingled?
• Do they share clients or customers?
The DOL emphasized that it is not necessary for all, or even most, of these factors to exist in order to find joint employment status between two or more related employers.
V. NLRB Focus On Joint Employers
The National Labor Relations Board (NLRB) has also been expanding its use of joint employment status to hold companies liable for violations of the National Labor Relations Act. Although the DOL stated in a recently issued Questions and Answers document that its joint employment analysis is different than that used by the NLRB, reports suggest that the office of the Solicitor of Labor reached out to the NLRB’s General Counsel on the issue of joint employment in advance of issuing the new Administrator’s Interpretation. It is clear that both agencies are focused on a broad application of the joint employer doctrine.
a) What Does This Mean for Employers?
If joint employment is found, both entities may be held responsible for compliance with all applicable laws, including wage and hour and other employment protection laws. This includes making sure non-exempt employees are paid minimum wage for all hours worked and overtime pay for hours worked over 40 in a workweek. For employers covered by MSPA, both employers are liable for ensuring necessary disclosures of the terms and conditions of employment, and payment of wages are made, as well as maintaining required written payroll records. A joint employer could also find itself named as a co-defendant in a tort liability suit brought against the “primary actor” employer.
Joint employment also applies for determining eligibility and coverage under the Family and Medical Leave Act (FMLA). This is critical as smaller employers with less than 50 employees may think they are free of any FMLA obligations, only to find that they meet the coverage threshold if they are deemed to be a joint employer with another entity, such as a staffing agency that provides them with additional workers. Similarly, joint employer status could affect compliance under the Affordable Care Act.
In light of this new guidance and the emphasis by the federal government on broad application of joint employment, staffing agencies, PEOs, and their clients should examine their relationships, including but not limited to, the degree of control, supervision, termination rights, setting of pay rates, and provision of tools, training, and policies exerted by the client company. The higher the degree of control and reservation of rights over the workers, the higher the chance that a joint employment relationship will be found. This also means that clients may ask staffing agencies to provide additional information about their compliance with applicable laws so as to gauge their level of risk. In fact, compliant staffing companies that are violation-free may see that as a marketing point in the future.
In the end, if employers comply with applicable laws, joint employment need not come into play. It is only when compliance takes a back seat and government investigators arrive at the door, that companies need to worry about whether they are a joint employer. Otherwise the issues will be dealt with in civil court.
Please contact us or seek the advice of competent counsel to advise you of your rights. PLEASE BE ADVISED: Views expressed are not intended to be legal advice and does not create an attorney-client relationship.