“As Broad as Possible”: New Joint Employment Guidance Could Have Major Impact on Staffing Firms and the Companies that Use Them

January 2016

In yet another reevaluation of what it means to be an employer, the U. S. Department of Labor (DOL) has clarified the standards for determining when two or more businesses are joint employers. The DOL's January 20, 2016 guidance articulates a broad standard, which directly applies to laws enforced by the DOL's Wage and Hour Division, most notably the Fair Labor Standards Act (FLSA). It comes soon after the DOL's recent expansive guidance on misclassification of employees as independent contractors and the National Labor Relations Board's August 2015 expansion of its own joint employer test under the National Labor Relations Act. Any employer who shares workers with another employer should take notice.

What is the significance of joint employment under the FLSA?

In a joint employment situation, both companies are equally responsible for wage and hour violations, regardless of which employer actually caused the problem. This is true even if only one entity controls the payroll and human resources functions for the employee at issue.

How does the DOL's joint employment standard compare to other labor laws?

The FLSA defines "employ" as "to suffer or permit to work." The guidance characterizes this as the broadest definition of employment possible. It contrasts with common law and other state and federal labor laws, where the existence of an employment relationship focuses on the level of control that a putative employer either exercises (or has the right to exercise) over the individual. However, in light of the FLSA's broader definition of employ, the guidance takes a wider view, attempting to glean the "economic realities" of the relationship between worker and employer. Thus, companies might be joint employers under the FLSA even if they are not joint employers under other workplace laws.

What factors are to be considered in the economic realities analysis?

The test is designed to consider all relevant circumstances, but the guidance enumerates factors that are likely to be relevant in assessing the relationship:

  1. The extent to which the work performed by the employee is controlled or supervised by the potential joint employer;
  2. The extent to which the potential joint employer has the power to hire, fire, or otherwise dictate the wages, hours, terms and conditions of the work;
  3. The permanency and duration of relationship;
  4. The extent to which the employee's work for the potential joint employer is repetitive and rote, is relatively unskilled, or requires little or no prior training;
  5. The extent to which the employee's work is an integral part of the potential joint employer's business;
  6. The extent to which the employee performs the work on premises owned or controlled by the potential joint employer; and
  7. The extent to which the potential joint employer performs administrative functions typically handled by an employer, such as handling payroll; providing workers' compensation insurance; providing necessary facilities and safety equipment; housing, or transportation; or providing tools and materials required for the work.

Are there other ways to create a joint employment relationship?

Yes. Aside from the joint employment characterized by two unrelated employers' contracting with one another for an employee's labor (so-called "vertical joint employment"), a "horizontal joint employment" relationship exists when there is an established or admitted employment relationship involving the employee and multiple employers. The question is whether the employers are sufficiently associated or related. Factors include common ownership, common control of back-office tasks like payroll, and common supervision. For example, a nurse who works during a single week for three hospitals within the same hospital system is likely jointly employed by the three hospitals. This means that if she works cumulatively more than 40 hours for the three hospitals, all three would be equally responsible to ensure that she received all overtime due under the FLSA.

What types of employers will be affected?

Joint employment can arise in many contexts. But the new guidance will have the greatest impact on the relationship between staffing (sometimes referred to as "outsourcing") firms and the employers who rely upon them to augment their regular workforce. Although employees may be nominally employed by the staffing firm (which generally recruits them, places them, signs their paycheck, and provides them with benefits), they actually work for a contracting employer that benefits from and relies upon the employee's labor, provides supervision, and sets the terms, location, and duration of employment. Under the DOL's analysis, there is a strong chance that these employees are economically dependent on the contracting employer and would be jointly employed by both their "actual" employer and the contracting employer.

Will a finding of joint employment cause liability?

In and of itself, joint employment does not create liability. Instead, it expands the pool of potential defendants in the event that a wage and hour violation occurs. Both employers will be responsible for ensuring that employees are treated in compliance with the law. And under the legal concept of joint and several liability, an aggrieved employee could recover fully against any of her joint employers. This will likely lead to attempts to recover from the entity believed to have the deepest pockets. Given the vast increase in FLSA lawsuits over the past few years, employers who might be involved in a joint employment relationship should be mindful of the risks.

What should employers who share employees do in response to the new guidance?

Although the interests of sharing employers differ depending on whether they are providing or receiving the labor, there are steps that both should take to evaluate their status.

First, employers should evaluate whether they are likely engaged in a joint employment relationship at all. Consider what type of workers are provided (e.g., highly trained versus unskilled), evaluate how they fit into the client's business (e.g., integral to their business versus part of a discrete project), and review where they perform the work and who directly supervises them. This should provide a good sense of whether a joint employment relationship exists.

Second, employers should consider whether there are ways to modify the relationship to reduce the likelihood of a joint employment finding. This might mean ceding control over employment conditions or more clearly differentiating between regular employees and contract workers. However, in most cases, joint employment will be determined by the nature of the job and will not be easily undone.

Third, employers should evaluate their staffing contracts. All employers should make sure there is a clear delineation of who is responsible for benefits, payroll, supervision, etc. If not, employers should consider clarifying the parties' roles when the agreement next comes up for revision. And employers should make sure that they understand the scope of any indemnification provision applicable to employment practices, including wage and hour violations. However, even if the agreement disclaims any joint employer status, the facts of relationship itself—not the contract disclaimer—will govern.

Fourth, employers should keep lines of communication open with both employees and business partners. The primary employer unquestionably has responsibility for complying with the FLSA. That employer's additional risk is that some action of a joint-employer client will adversely affect an employee and leave the contracting employer exposed. Such employers should remind nonexempt employees that they are entitled to receive pay for all hours worked (with overtime for hours beyond 40) and that exempt employees should report any improper deductions from their salaries. Good communications with the client employer can also help to ensure that no one is pressuring employees to work "off the books" or in any other way that would expose either employer to FLSA liability.

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