The U.S. Department of Labor’s final rule clarifying the joint employer standard took effect on March 16. The final rule, first announced on January 12, narrows the definition of joint employment and contains several practical examples of scenarios where joint employer status would or would not exist. The rule is a positive development for employers, as it should assist employers in structuring their relationships with suppliers, contractors, and staffing agencies.
The new rule applies only to the DOL’s interpretation of the Fair Labor Standards Act, which governs federal minimum wage, overtime, hours worked, among other things. Under the FLSA, an entity can be considered a “joint employer” if it exercises sufficient control over the terms and conditions of another entity’s workers. The existence of a joint employer relationship is a frequently litigated issue in the FLSA context, as joint employers are jointly and severally liable for FLSA obligations, such as the failure to pay overtime.
The DOL has not made substantive updates to its joint employer rules in more than 60 years. Federal courts currently apply several tests to determine whether two or more entities are joint employers. These inconsistent rulings have made it difficult for many employers to order their business activities to ensure that they are not joint employers. One of the stated purposes of the DOL’s new rule is to provide “clear and straightforward” regulations, in the hope of “encourag[ing] greater consistency for stakeholders.”
The DOL’s four-factor test
The DOL’s new rule adopts a four-factor balancing test to determine whether an entity is a joint employer. Specifically, the Department will consider whether a business
Hires and fires employees;
Supervises and controls the employees’ work schedules or conditions of employment to a substantial degree;
Determines employees’ rate and method of payment; and
Maintains employment records.
No one factor is dispositive, and the new rule provides that “whether a person is a joint employer will depend on all the facts in a particular case.”
Rule clarifies which factors are not relevant
The DOL’s four-factor test is not novel, as it contains several of the joint employment factors currently considered by federal circuit courts of appeal. However, the new rule lends significant clarity to the definition of joint employment by identifying numerous factors that the Department says are not relevant to the determination of joint employer status. Several of these “irrelevant” factors contradict current court precedent.
For example, in Salinas v. Commercial Interiors, Inc., the U.S. Court of Appeals for the Fourth Circuit held that courts should consider the degree of “economic dependence” between the two putative joint employers. The DOL’s new rule explicitly rejects this factor as not relevant to the joint employer analysis.
The final rule also provides that the following factors are either not relevant or are insufficient, standing alone, to confer joint employer status:
Operating as a franchisor. The final rule provides that the use of a franchisor‑franchisee model does not mean that a franchisor is more likely to be the joint employer of its franchisee’s employees.
Maintaining an employee’s employment records. The rule provides that maintenance of employee records, standing alone, will not lead to a finding of joint employer status if no other factors are present.
Unexercised ability to control an employee’s conditions of employment. Numerous federal courts have held that an entity’s ability to exercise control over another entity’s employees weighs in favor of joint employment status, even if the entity never exercises such control. The final rule expressly provides that such power, ability, or reserved contractual rights are not in themselves sufficient to establish FLSA joint employer status without some actual exercise of control.
Contractual agreements to comply with legal obligations or standards. Employers often enter into contracts with third parties (such as suppliers, contractors, and staffing companies) that require the other entity to comply with applicable laws or health and safety standards. The new rule provides that the maintenance, monitoring, or enforcement of such standards does not make joint employer status more or less likely. The rule provides examples of contractual provisions that are not relevant to the joint employer analysis: agreements mandating compliance with employment laws, agreements requiring background checks, and maintenance and enforcement of health and safety protocols.
Contractual requirements related to quality control standards. The maintenance and enforcement of quality control standards is one of the most frequently litigated issues in the joint employer context. For example, if Company A contracts with Company B to provide services, at what point does Company A’s enforcement of basic quality control standards against Company B’s employees constitute sufficient control to confer joint employer status? The rule says that the maintenance and enforcement of quality control standards or agreements, standing alone, do not make joint employer status more or less likely. The rule provides the following examples: provisions specifying the size or scope of a work project, provisions requiring the contractor to meet quality or quantity standards and deadlines, and provisions requiring the use of standardized products and services.
Provision of an employee handbook, “store within a store” arrangements, or association health or retirement plans. According to the new rule, to make joint employer status more likely under these scenarios, “the potential joint employer would have to not only provide such resources but would also have to somehow exercise control over the employees in relation to those resources.” Examples of such control might include directly or indirectly supervising employees on a regular, “substantial” basis; directly or indirectly controlling hiring and firing decisions (such as regularly mandating that a contractor terminate selected employees); or regularly assigning employees specific tasks or providing them with hands-on instruction.
The rule provides several practical examples illustrating the application of the four-factor test. These hypothetical scenarios provide employers with guidance that should assist them in structuring their relationships with third parties. The hypotheticals related to quality control standards (the fourth and fifth examples) should be particularly useful for employers, as these scenarios mirror the type of fact patterns that employers frequently encounter when dealing with contracted services.
The impact of the new rule remains to be determined. It establishes the manner in which the DOL will determine joint employment status in its own FLSA investigations and enforcement actions. It does not apply to the joint employer tests used under other federal statutes, such as Title VII or the National Labor Relations Act.
In addition, although federal courts typically look to agency interpretations for guidance, the new rule is not binding on the federal courts, nor does it alter interpretations of joint employer status under state wage and hour laws.
Nonetheless, the DOL’s final rule should be viewed as a step in the right direction for employers. Prior agency interpretations and federal case law on the joint employment issue have often left employers with more questions than answers. The rule simplifies and narrows the scope of the joint employment inquiry, which should make it easier for companies to model their behavior to ensure compliance with the FLSA. Companies that exercise any degree of control or supervision over another company’s employees are encouraged to consult with counsel regarding the impact of the rule.