On January 20, 2016, Department of Labor Wage and Hour Division (WHD) Administrator, David Weil, issued an Administrator’s Interpretation establishing new standards for Joint Employment under the Fair Labor Standards Act (FLSA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA). This guidance follows on the heels of the WHD’s July 15, 2015 guidance on the misclassification of employees as independent contractors, emphasizing the FLSA’s broad definitions and applying an “economic realities” test to determine whether a worker is economically dependent on the putative employer in such a way that the worker constitutes an employee for FLSA purposes. Notably, in Wednesday’s guidance, the WHD again advanced an “economic realities” test, this time for use in determining whether vertical joint employment exists, one of two new tests for determining joint employment status.
The WHD framed its guidance, which establishes an expansive definition of joint employment, as prompted by, and in response to, the changes in business models and staffing and labor arrangements in recent years. Administrator Weil, who noted that the WHD considers the issue of joint employment in hundreds of investigations every year, stated, “More and more, businesses are varying organizational and staffing models… The growing variety and number of business models and labor arrangements have made joint employment more common” and “the traditional employment relationship of one employer employing one employee is less prevalent.”
Administrator Weil expressed the WHD objective of reaching potential joint employers in these changing business models and extending liability under the FLSA and MSPA (both of which provide that joint employers are jointly and severally liable for compliance) as a means of extending statutory coverage to employers that are larger and well-established companies, who Administrator Weil reasoned, have a greater ability to implement policy and systematic changes to ensure compliance.
Administrator Weil’s comments make clear the target of these changes are large companies. And although the guidance issued applies to any employment setting where the issue of joint employment arises, certain industries in particular should take note: the Administrator specifically referenced the construction, agricultural, janitorial, warehouse and logistics, staffing and hospitality industries as examples of industries where the non-traditional organizational and staffing models targeted by the guidance are widely used.
Two Tests: Horizontal Joint Employment and Vertical Joint Employment
The WHD establishes two tests for determining joint employment, the horizontal joint employment test and the vertical joint employment test, stating, “The structure and nature of the relationship(s) at issue” are the determining factor as to under which theory a case should be analyzed—or if it should be analyzed under both theories, as the guidance leaves open that possibility, as well.
Under this new approach, horizontal joint employment examines the relationship between two or more potential employers in situations where the employee works for two or more employers with economic ties, for example, a restaurant worker who works at two different restaurants operated by the same company or a healthcare worker who works at two or more affiliated facilities. In such cases, the WHD signaled it will look to the factors contained in the FLSA regulations as guidance, although Administrator Weil indicated that this not an all-inclusive list of factors, and not all of the factors need to be present for joint employment to exist:
- 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);
- Do the potential joint employers have any overlapping officers, directors, executives or managers;
- Do the potential joint employers share control over operations (e.g., hiring, firing, payroll, advertising, overhead costs);
- Are the potential joint employers’ operations inter-mingled (for example, is there one administrative operation for both employers, or does the same person schedule and pay the employees regardless for which employer they work);
- Does one potential joint employer supervise the work of the other;
- Do the potential joint employers share supervisory authority for the employee;
- Do the potential joint employers treat the employees as a pool of employees available to both of them;
- Do the potential joint employers share clients or customers; and
- Are there any agreements between the potential joint employers?
Vertical joint employment, on the other hand, is concerned with the relationship between the employee and the potential employer, and the economic realities of that relationship, in particular, whether the employee is economically dependant on the putative joint employer. This approach borrows more heavily from the regulations interpreting joint employment under the MSPA, rather than the FLSA. Thus, the WHD signaled its intent to use an “economic realities” test. The following factors will be considered, but again, this not an exhaustive list, and the WHD did not articulate any bright line rules for applying this test or determining joint employment based on a vertical joint employment theory.
- 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. For example, if the work in the industry is by its nature seasonal, intermittent or part-time, such industry condition should be considered when analyzing the permanency and duration of the employee’s relationship with the potential joint employer.
- 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.
- 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, transportation, or providing tools and materials required for the work, those facts indicate economic dependence by the employee on the potential joint employer.
Administrator Weil reasoned that the concept of joint employment, “should be defined expansively under the FLSA and MSPA,” consistent with the broad definition of “employ” under these statutes, which, he reasoned, rejected a more narrow common law definition of employ.
The Potential Impact For Businesses
The WHD is likely to use its new distinction between horizontal and vertical joint employment and its departure from FLSA regulations in favor of the “economic realities” test to increase the number of employers who are found to be in violation of the statutes. This will likely also cause companies seeking to bring in contactors to shy away from smaller businesses that do not have the same ability as larger businesses to indemnify the company against potential wage/hour violations. Plenty of uncertainty accompanies these changes, as the new standards are far from clear as is the legal authority of a test articulated in this kind of administrative guidance. Nevertheless, particularly since this follows closely on the heels of the NLRB’s recent Browning-Ferris decision, the Administrative Interpretation is a clear signal that joint employment will continue to be a hot issue for the Department of Labor in 2016, making it a hot topic for businesses and employers, as well. At Sidley Austin LLP, our Employment and Labor lawyers are well versed in advising clients and litigating claims concerning potential joint employment issues.
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|James D. Weiss
+1 312 853 7333
Employment and Labor Practice
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