Department of Labor Issues Final Rule on Joint Employer Status

Over the weekend, the U.S. Department of Labor issued its final rule for interpreting "joint employer status" under the Fair Labor Standards Act (FLSA). "Joint employer status" applies in situations where two or more persons or entities are jointly and severally liable for an employee's wages under the FLSA. The new rule is significant for employers – particularly those who operate through franchise models or who routinely work with staffing agencies to fill temporary positions – because the rule's four-factor test for evaluating joint employer status will likely cover fewer employers than current DOL regulations. In addition, the new rule provides several examples to help employers, employees and courts apply the new joint employer test. Barring legal challenges or congressional disapproval, the new rule will take effect March 16, 2020.

For more than 60 years, the DOL's joint employer rule provided that two or more employers would be considered joint employers of a particular employee (a) if the employment "by one employer [is] not completely disassociated from employment by the other employer(s)" or (b) if the two joint employers are "sufficiently associated" with one another with respect to the employee. The "sufficiently associated" prong of the test, which primarily applies to potential joint employers that are under common ownership or control, such as subsidiaries and affiliates, has proven relatively straightforward to apply and has not materially changed in the DOL's new rule. But the DOL and some courts, particularly during the Obama administration, had applied the "not completely disassociated" prong of the test to determine that some franchisees or contractors qualified as joint employers with their franchisees or contract counterparties.

The rule issued this month rejects these Obama-era standards. Under the new rule, one person will be a joint employer if that person acts "directly or indirectly in the interest of the employer in relation to the employee." To determine whether a person acts directly or indirectly in the interest of the employer in relation to the employee, the DOL has adopted a four-factor test that asks: Does the potential joint employer (i) hire or fire the employee; (ii) supervise and control the employee's work schedule or conditions of employment to a substantial degree; (iii) determine the employee's rate and method of payment; and (iv) maintain the employee's employment records?

No single factor is dispositive when applying the test, and the DOL's rule explains that it intends for the weight applied to each factor to vary depending on the circumstances. That said, the DOL's rule indicates that mere maintenance of an individual's employee records alone will not lead to a finding of joint employer status, suggesting that the fourth factor is somewhat less pivotal than the other three.

The DOL's rule also clarifies that merely holding the authority to exercise the powers represented in its four-factor test is dispositive of a potential employer's joint employer status. What is important under the DOL's rule is whether the potential employer actually exercises the powers outlined in its test. Thus, potential employers can take comfort knowing that the reservation of authority to exercise certain powers like hiring or firing employees or issuing work schedules will not automatically qualify them as joint employers under the DOL's new rule.

The DOL's new rule also makes clear that certain factors that sometimes have been considered in joint employer scenarios are irrelevant under its new test. Under the new rule, for example, the DOL will not consider whether an employee is economically dependent on the potential joint employer when determining joint employer status. That means the DOL will disregard whether the employee (i) is in a special job that requires special skill, initiative, judgment or foresight; (ii) has the opportunity for profit or loss based on his or her managerial skill; and (iii) invests in equipment or materials required for work or the employment of helpers. The DOL will also not consider whether the potential joint employer has entered into contracts with other individuals for services similar to those provided by the potential joint employee.

Likewise, the new rule requires the DOL to disregard certain contractual controls between the potential joint employer and its contract counterparty – the direct employer – when considering joint employer status. Thus, the new rule makes irrelevant the potential joint employer requiring a contract counterparty to adopt certain standards to protect the health and safety of employees; meet specified quality standards to ensure the consistent quality of work product, brand or business reputation; adopt sexual harassment policies; institute background checks; or require training related to health, safety or legal compliance.

The DOL's new joint employer test will likely result in fewer entities being deemed joint employers. Prior formulations of the joint employer test by the DOL and courts sometimes found joint employer status where one entity reserved the contractual right to hire or fire an employee. The retention of unexercised authority will not be an automatic basis for finding joint employer status under the new regulations (though sweeping reservation of rights coupled with evidence of exercising some limited authority could be relevant). Moreover, a company that requires its suppliers to meet certain quality standards or adopt practices for employee safety and wellbeing does not, absent other evidence, subject itself to joint employer status with its suppliers. The new rule provides several examples of these and other scenarios to help those with potential joint employer liability issues apply the new test.

Once it takes effect in mid-March, the DOL's new joint employer test will bind the DOL when it considers potential joint employer liability under the FLSA. But a note of caution is in order. The test does not apply to potential joint employer liability under other employment laws such as Title VII of the Civil Rights Act or the National Labor Relations Act. Nor will federal and state courts be required to follow the DOL's new rule – though it is likely that courts will need to revisit their own joint employer tests to the extent their tests were based on the DOL's prior rule.

Joint employer status has been an area of significant confusion. The new DOL rule aims to reduce that confusion and provide greater flexibility for certain types of business relationships without implicating potential joint employer status. Companies can adopt stronger brand protections, require certain safety practices, impose sexual harassment or anti-discrimination policies, or require employee training without risking a joint employer finding by the DOL. But unless and until courts and other governmental agencies like the Equal Employment Opportunity Commission and the National Labor Relations Board adopt rules similar to the DOL's new rule, joint employer status will continue to be an area that can trip up employers and potential joint employers.

The Employment and Labor attorneys at Robinson Bradshaw are available to consult and partner with clients to navigate the impact of the new rule on a client's particular workforce and contractual relationships.