Employers Receive Additional Guidance with the New Department of Labor Rule, Making It Easier to Avoid Classification as a Joint-Employer

The Department of Labor issued a final rule on January 12, 2020 regarding the interpretation of joint employer status under the Fair Labor Standards Act (FLSA).

The FLSA requires employers to pay employees the federal minimum wage for every hour worked and to pay overtime for every additional hour worked over 40 during a workweek. Liability for making such payments falls on the employer, which the FLSA defines as “any person acting directly or indirectly in the interest of an employer in relation to an employee.”

Since the FLSA’s enactment, the DOL has recognized that an employee can have two or more employers, known as joint employers. A Department of Labor regulation promulgated in 1958 described three situations in which two or more employers would be considered “joint employers:” The two employers had an arrangement to share the employee’s services; one employer was acting in the other employer’s interest in relation to the employee; and the two employers are not completely disassociated with respect to the employment of a particular employee and share control of the employee by virtue of the fact that one of the employers controls, is controlled by, or is under common control with the other employer.

The rule, which will go into effect on March 14, 2020, marks the first time that this regulation has been updated since it was adopted more than 60 years ago. The changes stem from the Department of Labor’s concern that the regulation does not adequately address the joint employer scenario that occurs most commonly under the FLSA, i.e., when an employer causes or allows an employee to work, and another person also benefits from that work. Currently, the regulation focuses on the relationship between the would-be employers, but offers no guidance as to whether the other person benefiting from the employee’s work is also the employer’s employer.

To address that topic, the Department of Labor issued the rule, which sets forth a four-factor balancing test for determining joint employer status under the FLSA when someone other than the employer benefits from the employee’s work. The test is derived from an opinion issued by the Ninth Circuit in 1983 in the case of Bonnette v. California Health & Welfare Agency.

The required factors examine whether the would-be employer:

  • Has authority to hire or fire the employee;
  • Supervises the employee’s schedule or conditions of employment;
  • Determines the employee’s compensation; and
  • Maintains the employee’s employment records.

The rule makes clear that no one factor is determinative, and the weight ascribed to each factor will vary based on the facts and circumstances of each case. However, the mere maintenance of the employee’s employment records is not, in and of itself, enough to demonstrate joint employer status. Instead, the would-be employer must exercise some control over the employee. Merely having authority to exercise control, without using such control, is insufficient to demonstrate joint employer status.

The rule acknowledges that additional factors may be relevant to the determination of joint employer status. For instance, it recognizes that the relationship between the potential joint employers is relevant in determining joint employer status in situations where multiple employers cause a single employee to work separate sets of hours during the same workweek, and there is a question as to whether those separate sets of hours should be aggregated for purposes of determining overtime eligibility. The final rule explains that the two employers described in the preceding sentence are deemed joint employers if they are sufficiently connected with respect to the employment of the employee.

Additionally, the rule also identifies factors that are not relevant to the determination. Among other things, the employee’s economic dependence on a would-be joint employer is not relevant to the determination. Likewise, the rule identifies certain business models (such as the franchise model), business practices, and contractual agreements that decrease the eligibility of the would-be employer from reaching joint employer status.