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DOL rule clarifying joint-employer relationships likely to result in fewer joint-employer findings

By Ronald Miller, J.D.

As expected, the business-friendly rule will likely limit the circumstances in which a joint-employment relationship is found.

On January 12, 2020, the U.S. Department of Labor announced a final rule to revise and update its regulations interpreting joint employer status under the FLSA. The final rule provides updated guidance for determining joint-employer status when an employee performs work for an employer that simultaneously benefits another individual or entity. The effective date of the final rule is March 16, 2020. The final rule is slated for publication in the Federal Register January 16, 2020. A Fact Sheet about the final rule is also available.

In the final rule, the Department:

  • specifies that when an employee performs work for the employer that simultaneously benefits another person, that person will be considered a joint employer when that person is acting directly or indirectly in the interest of the employer in relation to the employee;
  • provides a four-factor balancing test to determine when a person is acting directly or indirectly in the interest of an employer in relation to the employee;
  • clarifies that an employee’s “economic dependence” on a potential joint employer does not determine whether it is a joint employer under the FLSA;
  • specifies that an employer’s franchisor, brand and supply, or similar business model and certain contractual agreements or business practices do not make join- employer status under the FLSA more or less likely; and
  • provides several examples applying the Department’s guidance for determining FLSA joint-employer status in a variety of different factual situations.

Prior guidance. The Department has recognized since the FLSA’s enactment that an employee can have two or more employers who are jointly and severally liable for the wages due the employee (hence, joint employers). In 1958, the Department published an interpretive regulation, codified in 29 CFR part 791. The Department has been concerned that part 791 does not provide adequate guidance for the most common joint-employer scenario under the Act—where an employer suffers, permits, or otherwise employs an employee to work, and another person simultaneously benefits from that work.

“Simultaneously benefitting.” Section 791.2(a) provided that joint-employer status depends on whether multiple persons are “not completely disassociated” or “acting entirely independently of each other” with respect to the employee’s employment. Section 791.2(b) explained, “Where the employee performs work which simultaneously benefits two or more employers, or works for two or more employers at different times during the workweek,” the employers are generally considered joint employers in situations such as:

1. Where there is an arrangement between the employers to share the employee’s services, as, for example, to interchange employees; or
2. Where one employer is acting directly or indirectly in the interest of the other employer (or employers) in relation to the employee; or
3. Where the employers are not completely disassociated with respect to the employment of a particular employee and may be deemed to share control of the employee, directly or indirectly, by reason of the fact that one employer controls, is controlled by, or is under common control with the other employer.

Economic dependence clarified in final rule. Section 3(d) of the FLSA is the sole textual basis for determining joint-employer status. Although section 3(e) (defining “employee”) and section 3(g) (defining “employ” as including “to suffer or permit to work”) broadly define who is an employee under the Act, only section 3(d) addresses whether a worker who is an employee under the Act has another employer for his or her work.

The final rule provides that whether the employee is economically dependent on the potential joint employer is not relevant for determining the potential joint employer’s liability under the Act. Economic dependence is relevant when applying section 3(g) and determining whether a worker is an employee under the Act; however, determining whether a worker who is an employee under the Act has a joint employer for his or her work is a different analysis that is based on section 3(d). Thus, factors that assess the employee’s economic dependence are not relevant to determine whether the worker has a joint employer.

Four-factor test. The final rule largely adopts the analysis set forth in the Department’s proposed rule issued April 1, 2019. In the final rule, the Department will continue to describe and distinguish between the two joint-employer scenarios. In the joint-employer scenario where another person is benefitting from the employee’s work, the Department is adopting a four-factor balancing test derived from Bonnette v. California Health & Welfare Agency to assess whether the other person:

1. hires or fires the employee;
2. supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
3. determines the employee’s rate and method of payment; and
4. maintains the employee’s employment records.

No single factor is dispositive in determining joint employer status, and the appropriate weight to give each factor will vary depending on the circumstances. However, satisfaction of the maintenance of employment records factor alone does not demonstrate joint employer status.

In comments by senior department officials during a press call regarding the four-factor test, it was stressed that each franchise situation would have to be evaluated on a case-by-case basis. Additionally, all four factors do not need to be present to find joint employment. Clearly, however, a traditional franchise model is not automatically a joint-employment model.

Actual exercise of control. The Department’s final rule provides additional guidance on how to apply this test. For example, to be a joint employer under the Act, the other entity must actually exercise—directly or indirectly—one or more of the four control factors. The other entity’s ability, power, or reserved right to act in relation to the employee may be relevant for determining joint-employer status, but such ability, power, or right alone does not demonstrate joint-employer status without some actual exercise of control. The final rule also provides specific guidance on the meaning of “employment records” for purposes of applying the fourth factor and on what constitutes indirect acts of control for purposes of applying the factors generally.

Moreover, the final rule provides that additional factors may be considered, but only if they are indicia of whether the potential joint employer exercises significant control over the terms and conditions of the employee’s work. As noted, the final rule provides that whether the employee is economically dependent on the potential joint employer is not relevant for determining the potential joint employer’s liability under the Act.

Business models. The proposed rule identified certain business models (such as franchise model), business practices (such as allowing the operation of a store on one’s premises), and contractual agreements (such as requiring a party in a contract to institute sexual harassment policies) as not making joint employer status more or less likely under the Act. The final rule identifies even more business models, business practices, and contractual agreements as not making joint-employer status more or less likely under the Act.

“Multiple employers, separate hours, same workweek.” In the other joint-employer scenario under the Act—where multiple employers suffer, permit, or otherwise employ the employee to work separate sets of hours in the same workweek—the multiple employers are joint employers if they are sufficiently associated with respect to the employment of the employee. The Department adopted the analysis for determining joint employer status in the second scenario as proposed in the NPRM.

Examples. Finally, the final rule provides illustrative examples applying the Department’s analyses to factual situations, to provide more certainty and clarity regarding who is and is not a joint employer under the Act. DOL’s examples include:

(1) Example (nationwide restaurant franchise): An individual works 30 hours per week as a cook at one restaurant establishment, and 15 hours per week as a cook at a different restaurant establishment affiliated with the same nationwide franchise. These establishments are locally owned and managed by different franchisees that do not coordinate in any way with respect to the employee. Are they joint employers of the cook?

Application: Under these facts, the restaurant establishments are not joint employers of the cook because they are not associated in any meaningful way with respect to the cook’s employment.

(2) Example (same owner, multiple restaurants): An individual works 30 hours per week as a cook at one restaurant establishment, and 15 hours per week as a cook at a different restaurant establishment owned by the same person. Each week, the restaurants coordinate and set the cook’s schedule of hours at each location, and the cook works interchangeably at both restaurants. The restaurants decided together to pay the cook the same hourly rate. Are they joint employers of the cook?

Application: Under these facts, the restaurant establishments are joint employers of the cook because they share common ownership, coordinate the cook’s schedule of hours at the restaurants, and jointly decide the cook’s terms and conditions of employment, such as the pay rate.

(3) Example (janitorial services): An office park company hires a janitorial services company to clean the office park building after-hours. According to a contractual agreement with the office park and the janitorial company, the office park agrees to pay the janitorial company a fixed fee for these services and reserves the right to supervise the janitorial employees in their performance of those cleaning services. However, office park personnel do not set the janitorial employees’ pay rates or individual schedules, and do not in fact supervise the workers’ performance of their work in any way. Is the office park a joint employer of the janitorial employees?

Application: Under these facts, the office park is not a joint employer of the janitorial employees because it does not hire or fire the employees, determine their rate or method of payment, or exercise control over their conditions of employment.

(4) Example (landscaping services): A country club contracts with a landscaping company to maintain its golf course. The contract does not give the country club authority to hire or fire the landscaping company’s employees or to supervise their work on the country club premises. However, in practice a club official oversees the work of employees of the landscaping company by sporadically assigning them tasks throughout each workweek, providing them with periodic instructions during each workday, and keeping intermittent records of their work. Moreover, at the country club’s direction, the landscaping company agrees to terminate an individual worker for failure to follow the club official’s instructions. Is the country club a joint employer of the landscaping employees?

Application: Under these facts, the country club is a joint employer of the landscaping employees because the club exercises sufficient control, both direct and indirect, over the terms and conditions of their employment. The country club directly supervises the landscaping employees’ work and determines their schedules on what amounts to a regular basis.

(5) Example (staffing company): A packaging company requests workers on a daily basis from a staffing agency. The packaging company determines each worker’s hourly rate of pay, supervises their work, and uses sophisticated analysis of expected customer demand to continuously adjust the number of workers it requests and the specific hours for each worker, sending workers home depending on workload. Is the packaging company a joint employer of the staffing agency’s employees?

Application: Under these facts, the packaging company is a joint employer of the staffing agency’s employees because it exercises sufficient control over their terms and conditions of employment by setting their rate of pay, supervising their work, and controlling their work schedules.

(6) Example (association providing group benefits): An association, whose membership is subject to certain criteria such as geography or type of business, provides optional group health coverage and an optional pension plan to its members to offer to their employees. Employer B and Employer C both meet the association’s specified criteria, become members, and provide the association’s optional group health coverage and pension plan to their respective employees. The employees of both B and C choose to opt in to the health and pension plans. Does the participation of B and C in the Association’s health and pension plans make the association a joint employer of B’s and C’s employees, or B and C joint employers of each other’s employees?

Application: Under these facts, the association is not a joint employer of B’s or C’s employees, and B and C are not joint employers of each other’s employees. Participation in the association’s optional plans does not involve any control by the association, direct or indirect, over B’s or C’s employees. And while B and C independently offer the same plans to their respective employees, there is no indication that B and C are coordinating, directly or indirectly, to control the other’s employees. B and C are therefore not acting directly or indirectly in the interest of the other in relation to any employee.

(7) Example (supply chain contracts that include code of conduct, wage conditions): Entity A, a large national company, contracts with multiple other businesses in its supply chain. As a precondition of doing business with A, all contracting businesses must agree to comply with a code of conduct, which includes a minimum hourly wage higher than the federal minimum wage, as well as a promise to comply with all applicable federal, state, and local laws.

Application: Under these facts, A is not a joint employer of B’s employees. Entity A is not acting directly or indirectly in the interest of B in relation to B’s employees—hiring, firing, maintaining records, or supervising or controlling work schedules or conditions of employment.

(8) Example (hotel industry franchise providing sample employment forms, documents): Franchisor A is a global organization representing a hospitality brand with several thousand hotels under franchise agreements. Franchisee B owns one of these hotels and is a licensee of A’s brand. In addition, A provides B with a sample employment application, a sample employee handbook, and other forms and documents for use in operating the franchise. The licensing agreement is an industry-standard document explaining that B is solely responsible for all day-to-day operations, including hiring and firing of employees, setting the rate and method of pay, maintaining records, and supervising and controlling conditions of employment.

Application: Under these facts, A is not a joint employer of B’s employees. A does not exercise direct or indirect control over B’s employees. Providing samples, forms, and documents does not amount to direct or indirect control over B’s employees that would establish joint liability.

(9) Example (shared retail space requiring uniforms, code of conduct): A retail company owns and operates a large store. The retail company contracts with a cell phone repair company, allowing the repair company to run its business operations inside the building in an open space near one of the building entrances. As part of the arrangement, the retail company requires the repair company to establish a policy of wearing specific shirts and to provide the shirts to its employees that look substantially similar to the shirts worn by employees of the retail company. Additionally, the contract requires the repair company to institute a code of conduct for its employees stating that the employees must act professionally in their interactions with all customers on the premises. Is the retail company a joint employer of the repair company’s employees?

Application: Under these facts, the retail company is not a joint employer of the cell phone repair company’s employees. The retail company’s requirement that the repair company provide specific shirts to its employees and establish a policy that its employees to wear those shirts does not, on its own, demonstrate substantial control over the repair company’s employees’ terms and conditions of employment. Moreover, requiring the repair company to institute a code of conduct or allowing the repair company to operate on its premises does not make joint employer status more or less likely under the act.

Expert comment. When the Final Rule becomes effective, it will provide additional support to businesses claimed to be jointly and severally liable for unpaid wages alleged to be owed by workers who are not their own, observed Alexander Passantino, former Acting Wage and Hour Administrator, and partner in the D.C. Office of Seyfarth Shaw. The Final Rule, however, should not be viewed as reason for businesses generally to be less cautious in the measures taken to avoid joint employer responsibility. As a practical matter, for instance, providing handbooks, policies, and other materials to another employer’s employees will create less risk of imputing pay responsibilities beyond the direct employer; but additional safeguards such as disclaimers making clear that providing those materials does not create an employment relationship will remain prudent. All of this said, the Final Rule creates an opportune moment for businesses to examine their relationships with the workers from whom they receive beneficial services but whom they do not employ directly. The DOL’s new guidance provides a roadmap for further risk-mitigating measures, though interpretations of joint employment under state wage and hour law need to be considered as well.

Franchise group pleased. The International Franchise Association (IFA) praised the U.S. Department of Labor (DOL) for its release of the Joint Employer Rule under the FLSA. IFA’s President and CEO Robert Cresanti, sail that “This resolution provides much-needed clarity for the 733,000 franchise establishments across America, and returns to the traditional standard of business that has fundamentally supported and encouraged franchise entrepreneurship for decades.” By instituting a simple, four-part test to determine employer status, the DOL rule can clarify joint employer status, employer liability, and the roles and responsibilities of each party in a business relationship.

Workers vulnerable. Congressman Bobby Scott, Chairman of the Committee on Education and Labor, issued a statement asserting “The Department of Labor’s final rule conflicts with the Fair Labor Standards Act and congressional intent by drastically narrowing the Department’s interpretation of joint employment to circumstances under which a potential employer actually exercises control. Scott further argued that final rule limits how the Department will hold employers responsible for wage theft, child labor violations, gender or race-based pay discrimination, or limiting a breastfeeding worker’s right to break time to pump.