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DOL Guidance on Joint-Employer Standard Raises a Red Flag for Businesses

On Wednesday, January 20, 2016, the U.S. Department of Labor’s Wage and Hour Division (WHD) released an administrator’s interpretation that is intended to provide guidance to employers on the WHD’s position on the joint employer standard under the Fair Labor Standards Act and the Migrant and Seasonal Agricultural Worker Protection Act. See Administrative Interpretation No. 2016-1. This “guidance” proposes an expansion of the types of business relationships that can give rise to an employer-employee relationship for wage and hour liability purposes under the FLSA. In short, many employers may now be jointly and severally liable for wage and hour violations committed by entities that they do not directly control (e.g. independent contractors and/or strategic business partners). Employers should read and consider the administrative interpretation in the context of the entity’s current operations and business relationships.

The highlights of the memorandum are discussed below:

The FLSA’s joint-employer regulation can be found at 29 C.F.R. § 791.2. The key portion of the regulation states that a “single individual may stand in the relation of an employee to two or more employers at the same time under the [FLSA] . . . In this event, all joint-employers are responsible, both individually and jointly, for compliance with all of the applicable provisions of the act, including the overtime provisions, with respect to the entire employment for a particular workweek.”

In the administrative interpretation, the WHD takes the position that, due to the advent of outsourcing and distributed business models, it is necessary to expand the applicability of the joint-employer provision to ensure that all workers are afforded the full protections of the act. The WHD then explains its intent to evaluate potential joint-employer’s operations under a horizontal analysis and a vertical analysis.

The Horizontal Analysis

  • The WHD is likely to find a joint-employer relationship if the potential joint-employers are “sufficiently associated with or related to each other.” In this analysis, the focus is on the relationship between the potential joint-employers.
  • The potential joint-employers are particularly likely to be sufficiently associated for joint-employer purposes if they (1) share strong economic ties and/or (2) have common management or ownership.
  • For example, assume that Bob wholly owns five restaurants and each is organized as a separate LLC. Some employees are assigned to work at more than one of the restaurants throughout the week. The WHD would argue that all five restaurants jointly employ the shared workers.

The Vertical Analysis

  • The WHD is likely to find a joint-employer relationship if the facts suggest that the worker is economically dependent on the potential joint-employer. In this analysis, the focus is on the relationship between the worker and the potential joint-employer and the “economic realities” of the situation.
  • This analysis is appropriate when the potential joint-employer has contracted with an intermediary employer, that admittedly is the employer of the worker (such as a staffing agency or a payroll processing company), to provide workers to perform work on its behalf.
  • A joint-employer finding is particularly likely in this context if the workers are consistently performing work for the same potential joint-employer on an on-going basis. The WHD’s guidance takes the position that this arrangement suggests economic dependence and that the potential joint-employer cannot deny liability for the unlawful actions of the intermediary employer.
  • Most importantly, the WHD has taken the position that it will ignore any contractual language that purportedly absolves the potential joint-employer of liability, stating “The contract between the potential joint employer and the intermediary employer may purport to disclaim or deny liability or responsibility by the potential joint-employer as an employer. However, that type of contractual provision is not relevant to the economic realities of the working relationship between the potential joint-employer and the employee.”

Lack of Actual Control Is Not, In And Of Itself, A Defense to Joint-Employer Status

  • The WHD’s interpretation clearly identifies the agency’s disagreement with federal courts that have focused on the issue of actual control — whether the potential joint-employer exercises sufficient control over the workers. While the WHD acknowledges that control is a relevant factor, the guidance takes the position that lack of control is not conclusive. Per this guidance, an entity’s claim that it lacks sufficient control over workers while they are performing work for its benefit will not absolve the entity from a finding of joint-employer status. Additionally, WHD believes indirect control is just as a relevant as direct control. Therefore, the WHD will consider an unexercised right to control a worker as evidence in favor of finding a joint-employer relationship.

It is important to note that this administrative interpretation only presents the views of the agency, not the views of the federal courts. The WHD acknowledges that federal district courts throughout the country use varying forms of analysis to determine when a joint-employment relationship exists. Nonetheless, the DOL is providing clear notice of its intent to apply the joint employer standard in the manner set out in the guidance. Employers should immediately review their relationship with independent contractors and business partners under the new guidelines.

If you have any questions or comments please feel free to contact your Spencer Fane employment attorney. If you do not regularly work with a Spencer Fane employment attorney, please contact Frank Neuner or Paul Satterwhite with any questions.