The issue of “joint employment” under labor and employment laws has received much attention in the last few years, including attempts to hold franchisors responsible for franchisee’s employees. Both the Department of Labor and the National Labor Relations Board issued new regulations in 2020 to define when a company may be considered a joint employer and, therefore, jointly liable for violations of employment and labor laws.
Department of Labor Joint Employer Standard
The Department of Labor has issued a number of new regulations in the past few months, including the new minimum salary rate for salaried exempt employees. The final rule on joint employer status, published January 16, 2020, has received less attention, but may have as much significance to franchisors and businesses who regularly use subcontractors and were at risk for claims they were joint employers.
Any “employer” as defined by the Fair Labor Standards Act (“FLSA”) is responsible for paying both minimum wage and, when applicable, overtime. The FLSA defines “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee.” 29. U.S.C § 203(d). The term “employer” has been interpreted broadly enough to cover “joint employment” – making more than one person or entity for the FLSA obligations.
There are two primary joint employer scenarios: (1) where one entity is the employer but a second entity or individual benefits from the work and (2) where one individual or entity engages the employer for a certain number of hours per week and a second entity or individual engages then for a separate set of hours during the work week. The final rules establish a test for the first scenario, while leaving intact the prior standards for the second scenario.
A secondary entity can be considered a joint employer if they exercise sufficient control over the employee. The new rules establish a four-factor test for determining if there is sufficient control to establish a joint-employer relationship. Under the new rules, DOL will consider whether the potential joint employer:
(1) Hires or fires the employee;
(2) Supervises or controls the employee’s work schedule or conditions of employment to a substantial degree;
(3) Determines the employee’s rate and method of pay; and
(4) Maintains the employee’s employment records.
Whether a person is a joint employer depends on all the facts of a particular case, and the weight given each factor will depend on the situation. No single factor will be determinative and additional factors may be reviewed to determine control.
The final rule also identifies a list of factors that are not relevant to make joint employer status more or less likely. Such factors include, but are not limited to:
1. Whether the employee is economically dependent on the potential joint employer;
2. Other factors traditionally used to determine independent contractor status;
3. Operating as a franchisor or entering into a brand and supply agreement or similar business model;
4. Potential joint employer’s contractual agreements with the employer requiring the employer to comply with its legal obligations or to meet certain standards to protect the health or safety of its employees or the public;
5. Potential joint employer’s contractual agreements with the employer requiring quality control standards to ensure the consistent quality of the work product, brand, or business reputation; and
6. Potential joint employer’s practice of providing the employer with sample employee handbooks or forms, allowing the employer to operate a business on its premises, offering an association health plan or association retirement plan to the employer or participating in such plan with the employer, jointly participating in apprenticeship program with the employer, or similar business practice.
The final rule left intact the previous standards for determining joint employment in the second situation. If the employers are acting independently and are disassociated with respect to the employer of the employee, each employee will be considered a separate employer. If there is an agreement to share the employer’s services, then each employer is acting directly or indirectly in the interest of the other employer and will be considered joint employers.
National Labor Relations Board Joint Employer Standard
On February 26, 2020, the NLRB issued a final rule regarding joint employer status. The new rule reverses the Browning-Ferris decision reinstates the joint employer test that had been used for decades before the Browning-Ferris decision by the Board in 2015
Under the joint employer rule, two employers may be considered joint employers “only if the two employers share or codetermine the employees’ essential terms and conditions of employment.” The second company must possess and exercise “substantial direct and immediate control over one or more essential terms and conditions of employment.” Substantial control requires direct control that has a continuous consequential effect on the employees, and does not include sporadic, isolated, or de minimis exercise of control. The determination is made based on the totality of the circumstances.
The rule defines several key terms, such as “essential terms and conditions of employment” and “direct and immediate control.” The “essential terms and conditions of employment” over which a company must exercise “direct and immediate control” are wages, benefits, hours of work, hiring, discharge, discipline, supervision, or direction (one or more). Evidence of a contractually reserved right to control any of these essential terms and conditions is a factor that may be considered, but in itself is not enough to create a joint employment relationship without evidence that the company actually exercised substantial control.
The determination of joint employment under the National Labor Relations Act is important because if two entities are joint employers, both may have duties to bargain with a union and both can be liable for unfair labor practices of the other.
Companies that may benefit from the work of the employees of a third party should review their relationship with the third-party employees to help ensure that DOL, NLRB or other agencies will not be able to find that the company is a joint employee. Gammage & Burnham can help conduct an internal review of a company’s wage and hour compliance to help ensure compliance with all wage and hour laws.