Labor Department Releases Final Joint-Employer Rule

The U.S. Department of Labor (DOL) announced Jan. 12 a final rule narrowing the definition of "joint employer" under the Fair Labor Standards Act (FLSA) and providing clarity to businesses about franchise and contractor relationships. 

"The final rule, with practical examples provided in the text, provides a roadmap as to how an employer can structure relations with vendors to avoid joint employment wage and hour claims if under DOL scrutiny," said Michael Lotito, an attorney with Littler in San Francisco.

In its first significant update to the joint-employer rule in more than 60 years, the DOL created a four-factor balancing test to determine whether businesses share liability for federal FLSA wage and hour violations. The department will consider whether a business:

• Hires and fires employees.
  
• Supervises and controls employees' work schedules or conditions of employment to a substantial degree.
• Determines employees' rate and method of payment.
• Maintains employment records.

Reserving the right to control the employee's working conditions would not be enough to show that a business is a joint employer; the company would have to actually exert that control. So businesses likely won't be deemed joint employers if they stay out of the day-to-day employment decisions of their contractors and franchisees.

"The changes in this final rule break down barriers that keep companies from constructively overseeing, guiding and helping their business partners," said Wage and Hour Division Administrator Cheryl Stanton. "For small business owners, and the employees working in those businesses, the relationship and the guidance coming from franchisors and other contracting companies can greatly improve the workplace and help them create jobs."

The final rule will take effect March 16.

Employer-Friendly Changes

In addition to the four-factor balancing test, the final rule clarifies that an employee's "economic dependence" on a company doesn't determine whether that company is a joint employer under the FLSA. The DOL also provided several examples of how to apply the new rule in various scenarios.

"There is other good news for employers in the rule," Lotito said. Many organizations operate with complex supply chains where all the members of the chain are asked to, for example, conduct harassment training, ensure no human trafficking is taking place and generally to be in compliance with the law. Those standards are permitted under the rule as long as actual control is not exercised in hiring and firing, compensation and other employment factors.

The rule clarifies that the following factors don't influence the joint-employer analysis:

• Having a franchisor business model.
• Providing a sample employee handbook to a franchisee.
• Allowing an employer to operate a facility on the company's grounds.
• Jointly participating with an employer in an apprenticeship program.
• Offering an association health or retirement plan to an employer or participating in a plan with the employer.
• Requiring a business partner to establish minimum wages and workplace-safety, sexual-harassment-prevention and other policies.

"To make joint-employer status more or less likely, the potential joint employer would have to not only provide such resources but would also have to somehow exercise control over the employees in relation to those resources," the DOL said. 

For example, the department said, a business would be exercising control over employment conditions if it disciplined workers for not following certain policies or directed the actual employer to hire specific workers. These actions would go beyond "merely making resources available," according to the DOL.

"It's certainly a welcome change," said Marty Heller, an attorney with Fisher Phillips in Atlanta. "But there's so much more that could have been buttoned up to make this a more favorable rule."

There are loopholes, he said, because the DOL mentioned other factors, in addition to the four-factor test, that may be relevant in determining joint-employer status. "The goal of uniformity may be dampened by the possibility of alternative relevant factors to the analysis."

Tips for Businesses

HR professionals should engage with in-house and outside experts to help determine potential risks, to see how relationships with third parties operate in reality and not just on paper, and to review contractual language with vendors to ensure the highest degree of protection is obtained, Lotito said.

"But the way a company actually operates and not just the words in a contract matter," he noted. "Establish a compliance program and make sure key management is trained on why restrictions in relationships are critical."

Heller suggested that business leaders first broadly look at the relationships they have with third-party entities to get an idea of which, if any, could be challenged as joint-employer relationships. "Are you making decisions for any employees who aren't your own?" If the answer is yes, he recommended getting in touch with employment counsel to see how to work within the new rule.  

Employers should note that the rule applies only to wage and hour issues under the FLSA. "It does not have application to other federal statutes, let alone state laws," Lotito said, noting that it is unclear if the circuit courts will rally around the new DOL rule or continue with their various interpretations.

Additionally, the National Labor Relations Board and the Equal Employment Opportunity Commission are expected to issue rules about joint-employer status under the National Labor Relations Act and anti-discrimination laws, respectively. The board already has issued a proposed rule.

"We're in the middle of a whirlwind, and this rule isn't the first or the last of it," Heller said. "Employers should keep up with the news, because there's more to come."