Construction Law Blog

On January 12, 2020, the Department of Labor (DOL) announced a final rule to revise—and narrow—the definition of “joint employer” under the Fair Labor Standards Act (FLSA). Whether or not a company is a joint employer is a question that contractors who use staffing agencies, franchise businesses, and firms that outsource services should be asking themselves. In recent years, a growing number of Americans have found themselves in these types of work arrangements. A contractor or franchisor who is determined to be a joint employer can end up on the hook for wages that were illegally denied by the staffing agency or franchisee. The DOL’s new rule simplifies the joint employer analysis, which may work to the benefit of companies that outsource labor or services.

The FLSA requires covered employers to pay their employees at least the federal minimum wage for every hour worked and overtime for every hour worked over 40 in a workweek. To be liable for paying minimum wage or overtime, a person or entity must be an “employer” within the meaning of the FLSA. The DOL has always recognized that an employee can have two or more employers who are jointly and severally liable for that employee’s wages (i.e., joint employers). 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. 29 CFR 791.2(a). The regulation sets forth three situations where a joint employment relationship generally will be considered to exist:

• Where there is an arrangement between the employers to share the employee’s services;
• Where one employer is acting directly or indirectly in the interest of the other employer in relation to the employee; or
• 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.
• Missing from the regulation is guidance for the most common joint employer scenario: where an employer suffers, permits, or otherwise employs an employee to work, and another person simultaneously benefits from that work. Instead, part 791 focuses on the relationship between the employers, which is not necessarily the relevant inquiry. Supreme Court and circuit court precedent teach that determining joint employer status requires a careful analysis of the degree of control exercised by the potential joint employer over the employee.

The new rule, which will take effect March 16, 2020, seeks to remedy this deficiency by proposing the following four-part test for determining whether a company is a joint employer: Whether the potential joint employer (1) hires or fires the employee; (2) supervises and controls the employee’s work schedule or conditions of employment; (3) determines the employee’s rate and method of payment; and (4) maintains the employee’s employment records.

This test creates a much narrower definition of a “joint employer,” and gives companies greater flexibility to set standards without necessarily being considered a joint employer responsible for overtime or minimum wage violations.

Employers should review their service agreements and subcontracts and consider whether any modifications to those agreements—or the ways in which they do business—are necessary in order to benefit from the DOL’s new rule.