The U.S. Department of Labor (“DOL”) has published a final rule, which takes effect on March 16, 2020, outlining the new four-factor approach DOL will use to determine whether, under the Fair Labor Standards Act (“FLSA”), a business is a “joint employer” of another company’s employees and thus jointly and severally liable for wage and hour obligations. The new rule comes as good news for employers because it establishes a concrete and narrow standard for determining joint employer status and is expected to provide clearer guidance to federal courts making joint employer determinations.
The final rule represents the first time in 60 years that DOL has issued a joint employer rule, although over the decades it has issued guidance both expanding and contracting the scope of the definition and potential liability. Furthermore, the rule is consistent with a series of actions that DOL, under the Trump administration, has taken to rescind the previously broader definition of “joint employer” under the Obama administration (including its June 7, 2017 withdrawal of employee-friendly Administrator’s Interpretation guidance documents from 2015 and 2016).
Notably, the rule is part of the current administration’s economic stimulus initiative. DOL has indicated that the new rule is designed to “promote certainty for employers and employees, reduce litigation, promote greater uniformity among court decisions and encourage innovation in the economy.” In a DOL news release, Secretary of Labor Eugene Scalia explained that “[t]his final rule furthers President Trump’s successful, government-wide effort to address regulations that hinder the American economy and to promote economic growth.”
DOL’s new streamlined joint employer approach balances four factors to determine whether a business has sufficient control over another entity’s employees such that it should be considered a joint employer:
- Whether the business hires and fires the employees;
- Whether the business supervises and controls the employees’ work schedules or conditions of employment to a substantial degree;
- Whether the business determines the rate and methods of payment for the employees; and
- Whether the business maintains the employees’ employment records.
No single factor is controlling, with the weight of each to be considered on a case-by-case basis, and additional factors may be considered only if they indicate whether a putative joint employer is exercising significant control over the terms and conditions of the employee’s work. This guidance significantly narrows the range of factors that courts may consider in conducting analyses. The rule also makes clear that in order to be a joint employer under the FLSA, the potential joint employer must actually exercise–directly or indirectly–one or more of the four control factors. The mere potential for an entity to exercise a certain amount of control over an employee is not enough to expose the entity to liability as a “joint employer”; rather, there must be a showing of actual exercise of such ability, power, or right.
In the ruling, DOL also highlighted certain factors that would not, in and of themselves, indicate joint employer status, including:
- Existence of a franchisor business model;
- Use of profit sharing or eventual hiring of temporary workers;
- Dictating the specific location or timing of work;
- Monitoring or ensuring compliance by suppliers, vendors, subcontractors, or franchisees with contractual obligations or with health, safety, or legal obligations;
- Requiring, monitoring, and enforcing another business’s compliance with quality control standards; or
- Providing business advice, benefits, or resources (for example, providing materials or suggesting methods that a franchisee, subcontractor, or other entity can use to improve business strategies or profitability).
Notably, NLRB and EEOC currently apply their own, different, standards for determining joint employment, although both agencies are expected to release updated rules in the coming months. State law tests may vary as well. To manage risks, businesses should continue to carefully monitor their relationships and contracts with other entities to ensure that they are not directly or indirectly exercising control over workers the business does not directly employ, and should consider whether other safeguards may be needed. More information on DOL’s new rule is available on the agency’s website.