Commentary From Counsel - Department of Labor Changes Interpretation of Joint Employer Status

Department of Labor Changes Interpretation of Joint Employer Status

On January 12, the Department of Labor significantly changed how it determines joint employer status for the first time in more than 60 years. The Department has sold the new rule as one that gives employers, especially franchisors, contractors, and the businesses they partner with, more flexibility. Ultimately, this rule change presents the opportunity for both your agencies and your clients to reconsider joint employer status and to update potentially outdated employment agreements.

The Rule Change Updating Joint Employer Status Under the FLSA Originally passed during the New Deal, the Fair Labor Standards Act (“FLSA”) creates a right to a minimum wage and the right to overtime pay for any work done in excess of 40 hours per week. Under FLSA, employers that repeatedly or willfully deprive their employees of these rights can face a penalty of up to $1,000 per violation as well as claims for substantial damages in private causes of action, including shifting of attorneys’ fees to plaintiffemployees if they are successful on their claims. Importantly, based on the nature of the working relationship, FLSA considers some workers jointly employed by multiple employers. These joint employers are jointly and severally liable for violations of FLSA.

The Department of Labor envisions two potential scenarios in which someone may be jointly employed. The first is when an employee works for two employers on a regular basis and those employers are “sufficiently associated with respect to the employment of that employee.” The next scenario occurs when a person works for one employer but another business simultaneously benefits from that work.

The Department’s recent rule change, set to take effect mid-March, impacts the interpretation of joint employer status in that second, simultaneous benefit, scenario. To determine joint employment in this context, the Department adopted a four-part balancing test largely developed by the Ninth Circuit Court of Appeals. Specifically, regulators attempt to gauge the amount of control a potential joint employer exercises over an employee by analyzing: (1) whether the employer can hire or fire the employee; (2) whether the employer supervises the employee’s work schedule or conditions of employment to a substantial degree; (3) whether the employer determines the employee’s hourly rate and method of payment; and (4) whether the employer maintains the employee’s records. While the Department will consider each of these factors when making joint employment determinations, none of them necessarily control the outcome and their individual weights will vary based on the circumstances.

Now What? It is difficult to say how exactly this balancing test will alter

the joint employment landscape. However, in their press release announcing the rule change, the Labor Department characterized the new rule as “break[ing] down barriers that keep companies from constructively overseeing, guiding and helping their business partners.” This suggests that interpretations of the new rule will likely make achieving joint employer status more difficult, benefitting employers. Still, it remains to be seen how regulators in the Department of Labor’s Wage and Hour Division will interpret the new rule.

As such, it is equally difficult to predict how this rule change might impact your agencies or your clients moving forward. While the administration has stated this new test will benefit businesses, employers may risk fines by rushing to change wage structures before it is clear how the Wage and Hour Division will enforce the rule. However, this change undeniably presents a potential opportunity for current joint employers to shed some levels of FLSA liability.

As such, it is critical that both your agencies and your clients consult with legal counsel regarding the effects of this new rule on employee-employer relations. The Department of Labor has made clear that interpretation of the new balancing test will vary based on circumstances, but your legal counsel will be able to detect patterns once the regulation has been enforced in a variety of contexts. After that, your agency and its clients will be able to design wage structures and employment agreements that accurately reflect liability under FLSA.

Conclusion As the current standards have effectively been in place for more than half a century, it is difficult to know how regulatory boards will enforce this new rule. However, the change may present an opportunity for you and your clients to revamp employment agreements in light of changes to joint employer status under FLSA. This is especially true for Franchisors, contractors, and the like. In making these changes, be sure to consult with legal counsel to create an employment model that both meets your needs as a business and avoids any potential liability. We will continue to follow developments and legal interpretations under this new rule and keep you informed in this column and through IIAW events.

> Josh Johanningmeier IIAW General Counsel