DOL Proposes New Rule to Determine Joint Employer Status Under the FLSA

In the first meaningful revision of its joint employer regulations in over 60 years, on Monday, April 1, 2019 the Department of Labor ("DOL") proposed a new rule establishing a four-part test to determine whether a person or company will be deemed to be the joint employer of persons employed by another employer. Joint employer status confers joint and several liability with the primary employer and any other joint employers for all wages due to the employee under the Fair Labor Standards Act ("FLSA"), and it’s often a point of dispute when an employee lodges claims for unpaid wages or overtime.

Under current DOL regulations, two or more employers acting entirely independently of each other may be deemed joint employers if they are “not completely disassociated” with respect to the employment of an employee who performs work for more than one employer in a workweek. In its proposal – a sharp departure from earlier Obama-era proposals to broaden the test for determining joint employer status to one based on economic realities – the DOL seeks to abandon the “not completely disassociated” test and has proposed to replace it with a four-part balancing test derived from Bonnette v. California Health & Welfare Agency, a 1983 decision by the Ninth Circuit Court of Appeals. Under the new rule, joint employer status would be determined by considering four key factors assessing whether the potential joint employer actually exercises the power to:

• Hire or fire the employee;
• Supervise and control the employee’s work schedules or conditions of employment;
• Determine the employee’s rate and method of payment; and
• Maintain the employee’s employment records.

Additional factors may be considered if they are indicative of whether the potential joint employer is (1) exercising significant control over the terms and conditions of the employee’s work, or (2) otherwise acting directly or indirectly in the interest of the employer in relation to the employee. Note that under the DOL’s proposal, it would not be necessary for each of these factors to be present for a joint-employer relationship to be found.

This revised standard would apply with respect to only one of the two potential joint employer scenarios under the FLSA – where the work performed by an employee for the primary employer simultaneously benefits a second person or company. Notably, the DOL has not proposed to make any substantive revisions to the regulations addressing the scenario where an employee works separate hours for multiple employers in the same workweek.

The proposed new rule explains that an employee’s economic dependence on the putative joint employer does not determine the potential joint employer’s liability under the FLSA and identifies three examples of “economic dependence” factors – which commonly arise in the context of independent contractor analysis – that are not relevant to the assessment of joint employer status:

Whether the employee –

1. Is in a specialty job or a job that requires special skill, initiative, judgment or foresight;
2. Has the opportunity for profit or loss based on his or her managerial skill; and
3. Invests in equipment or materials required for work or the employment of helpers.

In providing guidance on how to apply this multi-factor test, the DOL also clarifies in the proposed new rule that particular business models (such as a franchisor), business practices (providing a sample employee handbook or allowing an employer to operate a facility on one’s premises, etc.), and contractual agreements (such as sexual harassment policies or requirements to comply with the law) do not make joint employer status more or less likely.

The proposed rule and the DOL’s News Release include nine illustrative examples showing how the new rule would apply in various illustrative scenarios.  Particularly relevant to owners/operators in the hospitality industry, one example is a country club that contracted with a landscaping company to maintain its golf course. In this example, the contract between the club and landscaper did not give the club authority to hire, fire or supervise landscaping employees, but in practice, a club official oversaw the work of the landscaper’s employees by “sporadically assigning them tasks throughout each workweek, providing them with periodic instructions during each workday, and keeping intermittent records of their work.” Moreover, at the country club’s direction, the landscaping company agreed to terminate an individual worker for failure to follow the club official’s instructions. Applying the proposed new rule to these facts, the DOL concludes that the country club would be a joint employer of the landscaping contractor’s employees because the club “exercises sufficient control, both direct and indirect,” over the landscaper’s employees’ terms and conditions on what the DOL states “amounts to a regular basis,” pointing out that such control was further established by the fact that the country club indirectly fired one of the contractor’s employees.

Other examples in the proposed rule address various scenarios that are specific to the relationship between two entities, such as a franchisor and its franchisees, noting for example that a franchisor or hotel management company providing “samples, forms, and documents” to franchisees “does not amount to direct or indirect control” by the franchisor over franchisees’ employees and thus would not subject the franchisor to joint liability for franchisees’ FLSA violations.

Why is the DOL overhauling the joint employer regulations?

In its Notice of Rulemaking, the DOL references similar efforts by the National Labor Relations Board ("NLRB") to alter its analysis for determining joint employer status under the National Labor Relations Act ("NLRA"). Unlike the DOL regulations, the NLRB joint employer standards have undergone multiple revisions – and reversals of those revisions – since 2015 and currently, the NLRB is engaged in rulemaking that would again revise this test. Under the NLRB’s proposed rule, published on September 14, 2018, employers would only be considered joint-employers where the putative joint employer possesses and exercises “substantial direct and immediate control over the essential terms and conditions of employment of another employer’s employees in a manner that is not limited and routine.” The period for comments on the NLRB’s proposed rule closed on January 28, 2019, and it is anticipated that the rule will be formally adopted later this year.

The DOL also points to legislative activity on the issue, including hearings by Congress and concern raised by multiple U.S. Representatives and Senators. The DOL states in the Notice that these and other developments have generated a tremendous amount of attention, concern, and debate about joint employer status in every context, including the FLSA.

According to the DOL, it designed the proposed new rule to “promote certainty for employers and employees, reduce litigation, and encourage innovation in the economy.” The revisions could have significant implications for employers across all industries, and particularly in the hospitality industry, such as franchisors, businesses, or clubs utilizing contractors and staffing firms or operating in partnering arrangements, as well as those engaged in providing temporary and other contingent workers. If put into effect, the new rule could lead to reduced litigation and compliance costs by limiting claims against putative joint employers, as well as greater uniformity among court decisions. The DOL also suggests that the new rule could promote innovation and certainty in business relationships.

Stakeholders and the public have 60 days to submit comments on the proposed new joint employer rule. We will continue to monitor this important development.