Are You a Joint Employer? WHD Issues Guidance in the Form of an Administrator’s Interpretation

On January 20, 2016, the Wage and Hour Division (WHD) of the U.S. Department of Labor released an Administrator’s Interpretation (AI) on joint employment under the Fair Labor Standards Act (FLSA) and Migrant and Seasonal Agricultural Worker Protection Act (MSPA). Continuing its quest to regulate changes in the traditional employee-employer relationship due to market, technology, specialization, and other drivers, the AI addresses the situation in which employees may have two or more employers to create a joint employment relationship. The WHD’s goal is to aggregate employees’ hours of work for joint employers for determining whether overtime compensation is due and to hold multiple employers jointly and severally liable for compliance with the FLSA and MSPA. Just as with the AI issued in 2015 on the misclassification of employees as independent contractors, WHD will use this AI to increase aggressive enforcement of joint employment status in its investigations. Only time will tell the extent to which courts may defer, if at all, to this AI.

In a statement claiming that the frequency of joint employment situations are increasing, WHD Administrator David Weil commented that the WHD has issued Administrator’s Interpretation No. 2016-1: Joint employment under the Fair Labor Standards Act and Migrant and Seasonal Agricultural Worker Protection Act in accordance with the agency’s “commitment to engage with and educate employers so they know about their responsibilities and can operate in compliance with the laws that we are tasked to uphold.” According to Weil’s statement, “Protecting workers in fissured workplaces—where there is increasingly the possibility that more than one employer is benefiting from their work—has been a major focus for the Wage and Hour Division in recent years.” While the AI states that WHD will continue to challenge evolving relationships in all industries, it singles out the agricultural, construction, hospitality, janitorial, logistic/warehouse, and staffing industries.

The AI has two main sections. The first concerns the definition of the employment relationship under the FLSA and MSPA. The second part concerns the situations in which horizontal or vertical analyses are applied in determining whether a joint employment relationship exists.

Definitions of the Employment Relationship and the Scope of Joint Employment

The AI points out that both the FLSA and the MSPA define “employ” as including “to suffer or permit to work” and that the scope of employment relationships is also the same under both laws. Like the definition of “employ” generally, the AI states, the concept of joint employment should be broadly defined—and, in particular, should be defined more broadly than the common law concepts of employment and joint employment. The main factor in the common law concept of joint employment—known as the common law control test—is the amount of control that an employer exercises over an employee “and not the broader economic realities of the working relationship” in the FLSA and MSPA contexts.

The AI relies in part on MSPA regulations to define the scope of employment relationships and joint employment status under both statutes. The “suffer or permit” standard of the FLSA and the MSPA covers a wider range of employment relationships. According to the AI, this standard “ensures that the scope of employment relationships and joint employment under the FLSA and MSPA is as broad as possible.”

Horizontal and Vertical Joint Employment

At the outset, the AI clarifies the difference between horizontal and vertical joint employment and states that the FLSA’s and MSPA’s regulations provide complementary guidance on joint employment.

Horizontal Joint Employment

According to the AI, horizontal joint employment exists in situations in which “the employee has employment relationships with two or more employers and the employers are sufficiently associated or related with respect to the employee such that they jointly employ the employee.” The AI notes that separate restaurants that share economic ties and have the same managers and home health care providers that share staff and have common management would be examples of horizontal joint employers. According to the AI, the FLSA joint employment regulation in 29 CFR Part 791 is useful when analyzing horizontal joint employment cases, whether arising under the FLSA or the MSPA.

In determining whether a horizontal joint employment relationship exists, the analysis focuses on the relationship between two (or more) employers to each other. Citing a variety of sources, the AI provided a list of non-exhaustive factors to consider “when analyzing the degree of association between, and sharing of control by, potential horizontal joint employers.” The factors, as listed in the AI, are as follows:

1. who owns the potential joint employers (i.e., does one employer own part or all of the other or do they have any common owners);
2. do the potential joint employers have any overlapping officers, directors, executives, or managers;
3. do the potential joint employers share control over operations (e.g., hiring, firing, payroll, advertising, overhead costs);
4. are the potential joint employers’ operations inter-mingled (for example, is there one administrative operation for both employers, or does the same person schedule and pay the employees regardless of which employer they work for);
5. does one potential joint employer supervise the work of the other;
6. do the potential joint employers share supervisory authority for the employee;
7. do the potential joint employers treat the employees as a pool of employees available to both of them;
8. do the potential joint employers share clients or customers; and
9. are there any agreements between the potential joint employers.

Vertical Joint Employment

According to the AI, vertical joint employment exists in situations in which the employee has an employment relationship with one employer, referred to as an “intermediary employer” and the economic realities show that he or she is economically dependent on, and thus employed by, another entity involved in the work, referred to as the potential joint employer. In the vertical joint employment situation, the employer that contracts with the intermediary employer to receive the benefit of the employee’s labor would be considered the joint employer. Examples of intermediary employers are staffing agencies, subcontractors, and labor providers.

According to the AI, the MSPA joint employment regulation is useful when analyzing potential vertical joint employment, whether arising under the MSPA or the FLSA. The AI clarifies that this does not mean that the MSPA joint employment regulation applies in FLSA cases but that they are “useful guidance in an FLSA case because of the shared definition of employment and coextensive scope of joint employment between the FLSA and MSPA.” Thus, according to the AI, when a potential vertical joint employment case arises under the FLSA “an economic realities analysis of the type described in the MSPA joint employment regulation should be applied.”

In determining whether a vertical joint employment relationship exists, the AI notes that a preliminary, threshold question is whether the intermediary employer is an employee of the potential joint employer. In cases where the intermediary employer is an employee of the potential joint employer, then any employee of the intermediary employer is an employee of the potential joint employer too and there is no need to analyze further the vertical joint employment criteria.

On the other hand, if the intermediary employer is not an employee of the potential joint employer, then the AI instructs that the vertical joint employment analysis should be conducted to determine whether an employee of the intermediary employer is also an employee of the potential joint employer, focusing on the economic realities of the working relationship between the employee and the potential joint employer.

The MSPA regulation provides a set of factors to apply an economic realities analysis in vertical joint employment cases. Although they do not all apply the same factors, several circuit courts of appeals have also adopted an economic realities analysis for evaluating vertical joint employment under the FLSA. Regardless of the exact factors, the FLSA and MSPA require application of the broader economic realities analysis, not a common law control analysis, in determining vertical joint employment.

The seven economic realities factors listed in the MSPA regulation that the AI characterized as “probative of the core question of whether the employee is economically dependent on the potential joint employer” who benefits from the employee’s work are as follows:

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.

According to the AI, vertical joint employers may include general contractors in situations in which a construction worker works for both a subcontractor and a general contractor, as well as situations in which a farmworker works for a farm labor contractor and a grower.

The Effect of Joint Employment 

The effect of being considered a joint employer is significant and can lead to expansive liability.  First, all hours an employee works each week for each joint employer will be aggregated “and considered as one employment, including for purposes of calculating whether overtime pay is due.” Thus, if during the same week an employee works 10 hours for one joint employer and 35 for another, that employee has worked a total of 45 hours during the work week and is entitled to overtime pay. 

Second, each joint employer is “jointly and severally” liable for unpaid overtime and full compliance with the FLSA by all joint employers. Thus, if one joint employer fails to pay overtime compensation, any of the other joint employers can be held responsible for the unpaid overtime and any penalties:

each joint employer is individually responsible, for example, for the entire amount of wages due. If one employer cannot pay the wages because of bankruptcy or other reasons, then the other employer must pay the entire amount of the wages; the law does not assign a proportional amount to each employer.

This AI represents a continuation of WHD Administrator David Weil’s assault on what he views as a “fissured workplace.” As with the AI concerning independent contractors issued in 2015, this document does not necessarily reflect a change in position by the WHD, but instead repackages its existing views in a single location.

Perhaps most significantly, and as was also true with the AI concerning independent contractors, this Administrator’s Interpretation places a heavy emphasis on economic dependence, as opposed to control, in determining whether a joint employment relationship exists, particularly in the context of potential vertical joint employment. If an individual employed by an intermediary, such as a staffing company or a subcontractor, is economically dependent on the entity contracting with the staffing company or subcontractor, the WHD very likely is going to take the position that a joint employment relationship exists.

One shortcoming of the AI is that it provides guidance under the FLSA based upon MSPA regulations without revising the current interpretations in 29 C.F.R. Part 791, which addresses joint employment relationships under the FLSA. While the guidance of the AI is helpful to employers, it should be accomplished by revising the joint employment relationship policy statements in Part 791.

While the AI may say little that is new, it shows that the DOL intends to continue pushing the issue of joint employment. When viewed in tandem with the related efforts of other federal agencies, it is a stark reminder that the Obama administration does not have any plans to ease its focus on employers in 2016, but will remain steadfast in its attempts to expand the scope and breadth of employment laws.

What Employers Can Do Now

The issuance of this AI should serve as a reminder to businesses that they need to think carefully about whether they may be viewed as joint employers over workers they do not consider to be their employees, even workers over whom they have little control. If they are likely to be considered joint employers, they need to consider whether they want to take steps to decrease this likelihood. For example, if two closely related entities concurrently make use of the services of certain employees, they may want to consider ending that approach. On the other hand, they may choose to accept the fact that they will be viewed as joint employers, identify the potential risks and liabilities that may result from joint employment, and decide in advance how they intend to minimize and allocate those risks, such as through an indemnification agreement.

Companies involved in intermediary worker engagements (e.g., staffing companies, subcontractors, and other intermediaries) will want to ensure, to the extent feasible, that they are not considered employers of each other’s employees. Thus, they will want to follow appropriate steps to show that the intermediaries’ employees are independent contractors and not employees. Even then, it may be difficult to show that a joint employment relationship does not exist with respect to the intermediaries’ employees. However, the more that a company and an intermediary can show that an intermediary’s employees are not economically dependent upon or controlled by the company, the greater the chance of defeating a joint employer argument. For example, the more that the work is performed away from the company’s premises, is of short duration, is subject to the rules and control of the intermediary, is unrelated to the core business of the company, and is not normally performed by the company’s employees, the more likely it is that the intermediaries’ employees will not be viewed as joint employees.