The Department of Labor’s new guidance about what constitutes a “joint employer” should cause businesses that use staffing agencies or other indirect “employment” structures or relationships to carefully review these arrangements.
Specifically, on Jan. 20, 2016, in a departure from what had been somewhat settled, the DOL issued guidance interpreting “joint employer” expansively, making clear that a business may be held liable for Fair Labor Standards Act (FLSA) and Migrant & Seasonal Agricultural Worker Protection Act (MSPA) violations committed by a “joint employer.”
FLSA and MSPA
Most employers should already be familiar with FLSA (29 U.S.C. §201 et seq.). FLSA establishes minimum wage, overtime pay, recordkeeping and youth employment standards for employers who engage in business in interstate commerce (most businesses today) or whose annual sales total more than $500,000. Lawsuits, including class action litigation, alleging wage and hour violations are commonly brought under FLSA.
The MSPA (29 U.S.C. §1801 et seq.) is the main federal law that protects farmworkers in the United States. The MSPA provides federal labor protections in the areas of labor contracting and recruitment, payment of wages, recordkeeping, housing, transportation and working conditions.
What is joint employment?
The new guidance describes two types of joint employment — horizontal and vertical. Horizontal joint employment occurs when two employers share employees. The focus of a horizontal joint employment analysis is on the relationship between the two employers. The DOL identifies several factors to consider when determining whether horizontal joint employment exists:
- Common ownership/management;
- Shared control over hiring and firing;
- Coordination of hours and scheduling;
- Joint supervision of employees; and
- Use of the same payroll systems.
For example, horizontal joint employment may be found where Erica, a bartender, works at Bar A for 30 hours during one week and at Bar B for 15 hours during the same week. If Bar A and Bar B are found to be joint employers (e.g. they share common management and coordinate employee schedules), Erica’s hours for that week may be combined, and Bar A and Bar B may be held jointly and severally liable for failing to pay Erica overtime compensation.
The DOL describes vertical joint employment as occurring when an employee of one employer (the “intermediary employer”) is economically dependent on another employer (the “potential joint employer”). The focus in determining whether vertical joint employment exists is on the economic realities of the relationship between the employee and the potential joint employer. Some factors that may be considered in determining whether vertical joint employment exists include:
- The potential joint employer’s degree of control and supervision over the work performed;
- The potential joint employer’s control of employment conditions, e.g., whether the potential joint employer has the power to hire or fire the employee, to modify employment conditions, and/or to determine the rate or method of pay;
- The permanency and duration of the employment relationship;
- The repetitive and rote nature of the work performed;
- Whether the employee’s work is an integral part of the potential joint employer’s business;
- Whether the employee performed work on the potential joint employer’s premises; and
- The performance of administrative functions commonly performed by employers.
For example, vertical joint employment may occur when a hospital hires nurses employed by a staffing agency. If the economic realities suggest that the hospital employs the nurses, e.g., if the hospital controls the nurses’ job performances, the nurses work for the hospital for long periods of time, and the hospital performs administrative functions for the nurses, the hospital may be found to be a joint employer, and thus jointly and severally liable for any FLSA violations committed by the staffing agency.
Who may be affected?
The new guidance will likely impact large and small businesses. The new guidance suggests that larger businesses (potentially with deep pockets) cannot escape liability for FLSA violations by hiring workers through smaller intermediary businesses or entering into arrangements to share employees with other businesses. Conversely, it also suggests that some small employers who would not normally be subject to FLSA may be deemed covered employers (and thus subject to FLSA) if they are found to be joint employers with another covered employer.
The new guidance affects all industries. The DOL predicts that businesses that frequently use workers hired through intermediary businesses, including those in the construction, medical, agricultural, janitorial, manufacturing, staffing and hospitality industries, will be especially affected.
What should businesses do?
Businesses that use these types of employment relationships should be mindful of this new guidance to evaluate their exposure and make necessary adjustments to avoid exposure for liability arising from these relationships, including liability caused by the joint employer’s conduct. Businesses should evaluate the risks and benefits of hiring employees through intermediary businesses or sharing employees and the terms and conditions of the agreements through which they engage in these arrangements.
Among the issues to be considered are indemnification and risk shifting or sharing of risk through insurance. Additionally, businesses need to consider taking steps to evaluate the measures undertaken by the potential “joint employer” to comply with applicable state and federal laws and regulations. After all, critical to managing the risk inherent in an employment relationship is developing an understanding of that risk.