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January 26, 2016

DOL Issues Guidance on Joint Employment Under the Fair Labor Standards Act

On January 20, 2016, the United States Department of Labor’s (the “DOL”) Wage and Hour Division issued an Administrator’s Interpenetration (the “AI”) to clarify who is accountable for violations of the Fair Labor Standards Act (the “FLSA”), 29 U.S.C. § 201, et seq. and the Migrant and Seasonal Agricultural Worker Protection Act (the “MSPA”), 29 U.S.C. § 1801, et seq. when two different entities both have ties to the same worker. A copy of the AI may be found at http://src.bna.com/b7j)

To determine joint employment, the DOL relies on the so-called “economic realities” test, which is substantially broader than the test used by the National Labor Relations Board (the “Board”) in determining joint employment. The AI discusses two methods—horizontal and vertical—for analyzing joint employment under the “economic realities” doctrine. According to the AI, one or both methods should be applied depending on the “structure and nature of the relationship(s) at issue.”

In contrast to the DOL, the Board utilizes the “right to control” test: the main question is whether the parent company exercises control, directly or indirectly, over employees at another company like a franchise or contractor.

Horizontal Analysis

In a possible horizontal joint employment situation, the focus of the analysis is the relationship between two (or more) employers. There is typically an established or admitted employment relationship between the employee and each of the employers, and often the employee performs separate work or works separate hours for each employer. For example a waitress who works for two restaurants that are operated by the same entity may be jointly employed by those entities.

A horizontal joint employment relationship generally exists in situations such as:

  • Arrangements between the employers to share or interchange the employee’s services;
  • Where one employer acts directly or indirectly in the interest of another employer in relation to the employee; or
  • Where the employers are associated “with respect to the employment of a particular employee and may be deemed to share control of the employee, directly or indirectly, by reason of the fact that one employer controls, is controlled by, or is under common control with the other employer.” 29 CFR 791.2(b).

The following facts may be relevant when analyzing the degree of association between, and sharing of control by, potential horizontal joint employers:

  • overlapping officers, directors, executives, or managers;
  • share and control over operations (e.g., hiring, firing, payroll, advertising, overhead costs);
  • inter-mingled operations (for example, is there one administrative operation for both employers, or does the same person schedule and pay the employees)
  • 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 Analysis

Under the vertical analysis, joint employment may exist if an employee of one employer is also economically dependent on another employer. In other words, the vertical analysis examines the economic realities of the relationship between two employers to determine whether the employees are economically dependent upon the potential joint employer and are thus its employees. For example, a vertical analysis is necessary to determine whether a construction worker who works for a subcontractor is also employed by the general contractor.

A threshold question in a vertical joint employment case is whether the intermediary employer is actually an employee of the potential joint employer. 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 employment analysis. For example, if a farm labor contractor is not actually an independent contractor but is an employee of the grower, then all of the farm labor contractor’s farmworkers are also employees of the grower.

Assuming the intermediary is not an employee, employment is determined by a factor-based “economic reality” test. Although the exact factors may vary by jurisdiction, there are seven basic economic realities factors that should be used as guides to resolve the ultimate inquiry whether the employee is economically dependent on the potential joint employer. The seven factors are:

1.  Directing, Controlling, or Supervising the Work Performed.
2.  Controlling Employment Conditions
3.  Permanency and Duration of Relationship
4.  Repetitive and Rote Nature of Work
5.  Integral to Business
6.  Work Performed on Premises
7.  Performing Administrative Functions Commonly Performed by Employers

In cases where 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. 29 C.F.R. 791.2(a).

Take Away for Employers

The growing variety and number of flexible work arrangements have made joint employment more common. Accordingly, employers should review their business models and consider revising their labor and employment arrangements to help limit exposure to liability as joint employers. We encourage employers to contact us for help in reviewing or drafting new labor arrangement documents, including contracts with sub-contractors.

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If you have any questions regarding this Administrative Interpretation by the DOL or related employment arrangements, please do not hesitate to contact us.