Vol 49, No 3
A recent ruling from the 2nd U.S. Circuit Court of Appeals increases the likelihood that companies will be considered joint employers along with their contractors.
Although the decision directly affects only businesses in New York, Connecticut and Vermont, it is sure to influence courts in jurisdictions throughout the country. As a result, it is potentially significant for all businesses that subcontract out some aspect of their work.
The court’s decision in Zheng v. Liberty Apparel Co. (No. 02-7826, Dec. 30, 2003), clarifies the standard by which companies may be held liable for the wage and hour violations of subcontractors under the Fair Labor Standards Act (FLSA).
Historically, most lower courts have focused on the issue of “control” over the subcontractor’s employees when determining joint employer status. In fact, the 2nd Circuit itself used a control test in prior decisions but took a different course in Zheng.
In this case, the plaintiffs worked for a factory that contracted with various garment manufacturers, including Liberty Apparel, to sew some of the manufacturers’ goods. The workers sued both the garment factory and Liberty under the FLSA and state law, alleging overtime and minimum wage violations. The district court, applying the existing “control” test, held that Liberty was not the joint employer of the garment factory’s workers.
But the 2nd Circuit said its own prior control test was too narrow and could not be reconciled with the FLSA’s broad definition of employment. The court concluded that the existence of “control” is not necessary to determine joint employment. Rather, the court focused on six factors:
- Whether the contracting company’s premises and equipment were used for the subcontractor employees’ work.
- Whether the subcontractor had a business that could or did shift as a unit from one putative joint employer to another.
- The extent to which the subcontractor’s employees performed a discrete line-job that was integral to the contracting company’s process of production.
- Whether the employees under the contract passed from one subcontractor to another without material changes.
- The degree to which the contracting company or its agents supervised the contract employees’ work.
- Whether the subcontractors’ employees worked exclusively or predominantly for the contracting company.
Zheng’s impact will depend on how it is applied by lower courts and those in other jurisdictions. However, in moving away from a strict “control” test, the ruling increases the risk that businesses will be considered joint employers.
The ruling may particularly affect businesses in industries where subcontracting has historically been used to circumvent labor laws, even if in a given situation the outsourcing is not intended to be used in such a manner. Note also that it is unclear whether contractual indemnification clauses that purport to shift wage liability away from a joint employer are enforceable.
Marc A. Mandelman is a senior associate in the New York office of Proskauer Rose LLP, where he specializes in labor and employment relations. Recently, he represented clients in three major class action overtime cases in which the central issue was joint employer status.