In mid-January 2016, the Wage and Hour Division of the US Department of Labor (“DOL”) issued a new “Administrator’s Interpretation No. 2016-1” that set forth the standards for determining whether a company was a “joint employer” with another company and, as such, could be held jointly liable for violating the pay and labor provisions of the Fair Labor Standard Act (“FLSA”).
What is a joint employment?
“Joint employment” is the sharing of control and supervision of an employee’s activity among two or more business entities.
It is a longstanding principle under the FLSA that an employee can have two or more employers for the work that he or she is performing. When two or more employers jointly employ an employee, the employee’s hours worked for all of the joint employers during the workweek are aggregated and considered as one employment, including for purposes of calculating whether overtime pay is due. Additionally, when joint employment exists, all of the joint employers are jointly and severally liable for compliance with the FLSA.
The question that has been somewhat unclear is how does one determine when a joint employment relationship exists? This is the topic addressed in the “Administrator’s Interpretation No. 2016-1”.
“Administrator’s Interpretation No. 2016-1”
In these guidance materials, two joint employment scenarios are explored – horizontal joint employment and vertical joint employment – and standards for determining when the joint employment relationship exists are set forth.
Horizontal vs. Vertical Joint Employment
Horizontal joint employment occurs when two or more related businesses share an employee. For example, a housekeeper who works during a single week for three hotels owned by the same parent company is jointly employed by the three hotels. This means if she works cumulatively more than 40 hours for the three hotels, she would be entitled to overtime from all three, which would be jointly and severally liable for such pay under the FLSA.
Vertical joint employment occurs in situations in which the employee has an employment relationship with one employer, referred to as an “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, referred to as the potential joint employer. For example, if the housekeeper in the above example is employed directly by a staffing agency that the parent corporation engages to provide housekeepers to hotels, then the parent corporation might be deemed to be jointly and severally liable for violating the FLSA, along with the staffing agency and the three hotels, if the economic realities proved an employer-employee relationship between the hotel and the worker.
Factors For Horizontal Joint Employment
According to the guidance materials, the focus of the analysis for determining whether a horizontal joint employment exists is on the relationship between two (or more) employers to each other. Specifically, one must consider the following factors (among others) when determining the degree of association between, and sharing of control by, potential horizontal joint employers:
- Who owns the potential joint employers (i.e., does one employer own part or all of the other or do they have any common owners);
- Do the potential joint employers have any overlapping officers, directors, executives, or managers;
- Do the potential joint employers share control over operations (e.g., hiring, firing, payroll, advertising, overhead costs);
- Are the potential joint employers’ operations inter-mingled (for example, is there one administrative operation for both employers, or does the same person schedule and pay the employees regardless of which employer they work for);
- Does one potential joint employer supervise the work of the other;
- Do the potential joint employers share supervisory authority for the employee;
- Do the potential joint employers treat the employees as a pool of employees available to both of them;
- Do the potential joint employers share clients or customers; and
- Are there any agreements between the potential joint employers?
Factors For Vertical Joint Employment
According to the guidance materials, the analysis for determining whether a vertical joint employment exists is a two-pronged analysis.
First, one must determine if the intermediary employer is an employee of the potential joint employer. If that is the case, then any employee of the intermediary employer is an employee of the potential joint employer.
However, if the intermediary employer is not an employee of the potential joint employer, then further analysis must occur. The purpose of this analysis is to determine whether an employee of the intermediary employer is also an employee of the potential joint employer. This analysis focuses on the economic realities of the working relationship between the employee and the potential joint employer and takes into consideration the following economic realities factors:
- Directing, controlling, or supervising the work performed.
- Controlling employment conditions.
- Permanency and duration of relationship.
- Repetitive and rote nature of work.
- Integral to business.
- Work performed on premises.
- Performing administrative functions commonly performed by employers
Impact of Joint Employment
Knowing whether or not your organization is in a joint employment relationship with another organization is extremely important. Being considered a joint employer with another organization can potentially expose your organization to unexpected liability under the FLSA. There are two reasons for this unexpected liability.
The first relates to the calculation of overtime. When a joint employment relationship exists, the hours that an employee works in a week for all of his/her joint employers are considered hours worked for one employer. Therefore, if during the same week an employee works 20 hours for one joint employer and 25 for another, that employee has worked a total of 45 hours during the work week and is entitled to 5 hours of overtime pay under the FLSA.
The second relates to liability for unpaid wages. Each joint employer is “jointly and severally” liable for unpaid overtime and full compliance with the FLSA by all joint employers. This means that if one joint employer fails to pay overtime, fails to pay minimum wage, or otherwise violates the FLSA, any of the other joint employers can be held responsible for the violations and any penalties associated therewith.
What should employers do?
One important thing to remember is that Administrator’s Interpretation No. 2016-1 is not (technically) binding in any court and, at this point in time, it is unknown whether federal courts will adopt this guidance for determining whether a joint employer relationship exists. While that is true, it is extremely likely that the DOL will use these standards when it is analyzing potential joint employer relationships in the context of a DOL audit. In addition, it is highly probable that plaintiffs’ attorneys will attempt to use these standards to bolster their argument that a joint employment relationship exists. In light of these facts, it is advisable that employers use the standards to analyze their potential joint employment relationships and take steps to make sure that all organizations involved in a potential joint employment relationship are engaging in practices that are in compliance with federal (and state) laws.