Are You a Joint Employer?

Department of Labor publishes guidance to clarify

By Allen Smith Jan 21, 2016
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If you hire contract workers, there are new rules from the U.S. Department of Labor (DOL) you should be aware of.

The key issue focuses on contract employees who are shared by more than one employer, and who is liable for the workers' pay and hours under the Fair Labor Standards Act (FLSA).

More businesses are changing their staffing models by sharing employees or using staffing agencies, according to DOL Wage and Hour Administrator David Weil, explaining why the department issued guidance—Administrator’s Interpretation No. 2016-1—on joint employment.

“There’s not much discussion in the world about horizontal versus vertical employment,” noted Alexander Passantino, an attorney with Seyfarth Shaw in Washington, D.C., and former acting administrator of the Wage and Hour Division. “It’s not the typical way the issue has been discussed in the past.”

To fill the gap, the guidance goes into great detail of “horizontal joint employment” versus “vertical joint employment,” providing examples of each.

Passantino expects private litigants will use the document to catch more businesses as joint employers. As a result of the guidance, employers should “sit down and look at agreements and look at where all your relationships fall,” Passantino recommended. The guidance won’t lead to businesses getting rid of staffing agencies or subcontractors, but directs organizations to “work with reputable parties who do this the right way.”

Ask vendors if they have wage and hour experience and what they will do to ensure wage and hour compliance, he recommended. But don’t inadvertently create joint employment where it can be avoided.

Operations that are sharing employees may want to reconsider in light of this guidance, according to Alfred Robinson Jr., an attorney with Ogletree Deakins in Washington, D.C., and former acting administrator of the Wage and Hour Division. Employers need to understand that joint employment is an enforcement priority with the DOL, so they need to make sure they’ve checked operations that are vulnerable to a joint employer investigation, he added.

If an employer is considering contracting with a staffing agency, it should ask many due-diligence questions, according to Michael Lotito, an attorney with Littler in San Francisco, such as:

  • Has it conducted a wage and hour audit?
  • What indemnification would it provide in the event of a joint employer lawsuit?
  • Does it have Employment Practices Liability Insurance?
  • What happens if both companies are sued—are they both on their own or is there joint and several liability?

Discuss these things up front, Lotito recommended. And scrutinize business-to-business agreements.

Vertical Joint Employment

“Vertical joint employment exists where the employee has an employment relationship with one employer (typically a staffing agency, subcontractor, labor provider or other intermediary employer) and the economic realities show that he or she is economically dependent on, and thus employed by, another entity involved in the work,” the guidance stated.

Seven factors that suggest vertical joint employment are:

  • Directing, controlling or supervising the work performed.
  • Controlling employment conditions.
  • The permanency and duration of the relationship.
  • The repetitive and rote nature of the work.
  • Whether the work is integral to the business.
  • Whether the work was performed on the premises.
  • Whether the work was administrative functions commonly performed by employers.

As with its July 15, 2015, guidance on independent contractors, the DOL said that vertical joint employment analysis “must be an economic realities analysis and cannot focus only on control.”

Passantino noted that the DOL specifically rejected a 3rd U.S. Circuit Court of Appeals decision (In re Enter. Rent-A-Car Wage & Hour Emp’t Practices Litig., 683 F.3d 462 (3d Cir. 2012)) that primarily applied the control test. “This approach is not consistent with the breadth of employment under the FLSA,” the DOL guidance said.

As an example of a vertical joint employment relationship, the DOL hypothesized that a laborer works for ABC Drywall Company. The general contractor arranged for ABC Drywall to provide drywall labor. ABC Drywall hired and paid the laborer. The general contractor provided all of the training, necessary equipment and materials, workers’ compensation insurance, and is responsible for the health and safety of the laborer. The general contractor reserves the right to remove the laborer from the project, controls the laborer’s schedule, and provides assignments on site, and both ABC Drywall and the general contractor supervise the laborer. The laborer has been continuously working on the general contractor’s construction projects, whether through ABC Drywall or another intermediary. This would suggest joint employment, according to the DOL.

Horizontal Joint Employment

“Horizontal joint employment exists where the employee has employment relationships with two or more employers and the employers are sufficiently associated or related with respect to the employee such that they jointly employ the employee,” the guidance stated.

The following facts, among others, may be relevant when analyzing the degree of association and sharing of control by potential horizontal joint employers:

  • Who owns the employers? Does one employer own part or all of the other or do they have any common owners?
  • Do the employers have any overlapping officers, directors, executives or managers?
  • Do the employers share control over operations, such as hiring, firing, payroll, advertising and overhead?
  • Are the employers’ operations intermingled?
  • Does one employer supervise the work of the other?
  • Is supervisory authority for an employee shared?
  • Do the employers treat employees as a pool available to both of them?
  • Do the employers share clients or customers?
  • Are there any agreements between the employers?

The administrator provided the following example of a horizontal joint employer. An employee is employed at two locations of the same restaurant brand. The two locations are operated by separate legal entities. But the same individual is the majority owner of both. Managers at each restaurant share the employee between the locations and jointly coordinate the scheduling of the employee’s hours. The employers use the same payroll processor to pay the employee, and share supervisory authority.

Employers already understand horizontal joint employment; it’s vertical joint employment that’s more challenging, according to Allan Bloom, an attorney with Proskauer in New York City.

The DOL is “continuing a trend that started last year” in its only administrator opinion of 2015 on the same issues, he said. The DOL is interested in who is an employer, and “is casting as broad a net as possible.”

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.

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