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The DOL Is On Fire – Proposed Joint Employer Rule Issued

By Fiona W. Ong - Shawe Rosenthal LLP

April 1, 2019

An active and activist Department of Labor has issued its third proposed rule in less than a month – this one on joint employer status under the Fair Labor Standards Act. This follows proposed revisions to the overtime rule and to the regular rate rule.

Background – Under the FLSA, several entities may be the joint employers of a single employee as long as they are “not completely disassociated” with respect to the employment of the employee. These joint employers are then jointly and severally liable for the employee’s wages. The current joint employer rule contemplates two different joint employment scenarios: (1) where an employee’s hours worked for one employer simultaneously benefits another employer; and (2) where the employee works separate sets of hours for different employers in the same workweek.

The joint employer rule has not been meaningfully revised in over 60 years. In 2016, the DOL under the Obama administration issued an Administrator Interpretation (AI) in which it adopted an expansive “economic realities” test to assess joint employer status. This test heavily favored the finding of such status. The Trump DOL, however, withdrew the AI in June 2017, and stated that it would be seeking to revise the joint employer rule, which it has now done.

The Proposed Rule – The proposed rule primarily addresses the first joint employment scenario, and sets forth a four-factor test to assess whether the potential joint employer is acting directly or indirectly in the interest of the employer in relation to the employee. Under the test, which the DOL asserts is based on “well-established precedent,” the DOL examines whether the potential joint employer:

• hires or fires the employee;
• supervises and controls the employee’s work schedules or conditions of employment;
• determines the employee’s rate and method of payment; and
• maintains the employee’s employment records.

The DOL acknowledges that other factors may be relevant, but only if indicative of whether the potential joint employer is exercising significant control over the terms and conditions of the employee’s work or is otherwise acting directly or indirectly in the interest of the employer in relation to the employee. Of particular note, the potential joint employer must actually exercise the power to take these specifically identified or other such actions – the ability or reserved right to do so will not trigger joint employer status.

The DOL further asserts that an employee’s “economic dependence” on the potential joint employer is not determinative of liability under the FLSA. The DOL provides three examples of “economic dependence” factors that it deems to be irrelevant to the joint employer analysis, as such factors are only relevant to whether an individual is an employee or an independent contractor, and not on whether the potential joint employer is acting directly or indirectly in the interest of the employer in relation to the employee:

• the employee is in a specialty job or one requiring special skill, initiative, judgment or foresight;
• the employee has the opportunity for profit or loss based on managerial skill; and
• the employee invests in equipment or materials required for work or the employment of helpers.

The DOL also identifies certain business models, practices and agreements that do not make joint employer status more or less likely for an entity:

• Operating as a franchisor;
• Providing a sample handbook to a franchisee;
• Allowing an employer to operate a facility on the entity’s premises;
• Jointly participating in an apprenticeship program;
• Offering an association health or retirement plan to an employer or participating in such a plan with an employer;
• Requiring an employer to institute workplace safety measures, wage floors or sexual harassment policies.

Examples – The DOL also offered multiple examples of when joint employer status will and will not be found.

Joint employer status does not exist in the following examples:

• An employee who works as a cook for different franchisees of the same nationwide franchisor. The two franchisees do not act in each other’s interest, either directly or indirectly.
• A janitorial services company has an agreement to clean an office park building, under which the building agrees to pay a fixed fee and reserves the right to supervise the janitorial employees in their performance of cleaning services, but does not actually exercise the right of supervision. The reserved right does not demonstrate joint employer status.
• An association that provides optional group health coverage and an optional pension plan to its entity members, and the entity members who participate in the benefit plans. There is no control by the association over the entities’ employees, or by one entity over the other’s employees, and they are not acting directly or indirectly in the interest of the other.
• A large company that requires companies in its supply chain to comply with its code of conduct, which includes a minimum wage rate higher than the federal rate. The company is not acting directly or indirectly in the interest of the supply company in relation to the supply company’s employees.
• A global franchisor provides a franchisee with a sample employment application, handbook and other forms and documents. The franchisee is responsible for all day-to-day operations. The franchisor does not exercise direct or indirect control over the franchisee’s employees.
• A retail company contracts with a cell phone repair company to allow the repair company to run its business operations inside the retail company’s premises, and requires the repair company to have repair employees wear substantially similar shirts to its own employees and to institute a code of conduct requiring professional interactions with customers. The dress policy and code of conduct do not demonstrate substantial control over the repair employees by the retail company.

Joint employer status exists in the following examples:

• An employee who works at different restaurant establishments owned by the same person, whose schedule is coordinated and wage rate agreed on by the restaurants, since restaurants are sufficiently associated.
• A country club’s contract with a landscaping company does not give it the authority to hire or fire the landscaping employees or supervise them, but in practice, the country club sporadically assigns tasks, provides the landscaping employees with daily instructions, keeps records of their work, and directs the landscaping company to fire an employee. The country club exercises control, both direct and indirect over the terms and conditions of employment.
• A packaging company utilizing a staffing agency, where it determines the rate of pay, supervises the work, and adjusts the number of workers and hours worked by each employee. The packaging company exercises sufficient control over the terms and conditions of employment.

What Next? – There will be a 60-day comment period following publication of the Notice of Proposed Rulemaking in the Federal Register. You may submit comments electronically at https://www.regulations.gov/. Once the 60-day period has closed, the DOL will take some time to consider the comments and then subsequently issue the final rule. We expect pro-employee groups to oppose this proposed rule vigorously.

Regardless of what happens with the final rule, however, employers in the Fourth Circuit (which covers Maryland, Virginia, West Virginia, and the Carolinas) should be aware that they are subject to an extremely broad standard for determining joint employer status under the FLSA. In January 2015, the U.S. Court of Appeals for the Fourth Circuit announced a new and expansive joint employment status test in Salinas v. Commercial Interiors, Inc., under which, in our opinion, nearly all contractor or staffing agency relationships would be found to constitute joint employment.

Moreover, the standards for determining employee status differ under various federal laws, such as the National Labor Relations Act or the federal anti-discrimination laws. What this means is that employers may be subject to multiple standards for determining employee status, and should consult with counsel when faced with making such determinations.

Additional Resources – In connection with the AI, the DOL also issued a Fact Sheet and Frequently Asked Questions that reiterate the detailed examples of when joint employer status will and will not be found, which we have summarized above.

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