4.3.19

On April 1, the U.S. Department of Labor issued proposed regulations to clarify its interpretation of joint employer status under the Fair Labor Standards Act.

The DOL proposes a four-factor test to determine whether an entity would be considered a “joint employer” under the FLSA. The potential joint employer would have to actually exercise the power to

  • Hire or fire the employee
  • Supervise and control the employee’s work schedules or conditions of employment;
  • Determine the employee’s rate and method of payment; and
  • Maintain the employee’s employment records.

In proposing to adopt the four-factor test, the DOL relied on the 1983 decision in Bonnette v. California Health & Welfare Agency, with one critical exception. In Bonnette, the U.S. Court of Appeals for the Ninth Circuit found that “regardless of whether the appellants are viewed as having had the power to hire and fire, their power over the employment relationship by virtue of their control over the purse strings was substantial.” In other words, if the employer had the authority to hire and fire, it was a joint employer, whether or not that authority was ever actually exercised.

Under the proposed regulations issued yesterday, the right to hire and fire cannot be a “reserved” power or contractual right. According to the preamble of the proposed regulations, “Only actions taken with respect to the employee’s terms and conditions of employment, rather than the theoretical ability to do so under a contract, are relevant to joint employer status under the Act.” (Emphasis added.)

The proposed regulations include nine examples that the DOL hopes will “further help clarify joint employer status.” The examples involve workers at restaurants (both franchised and non-franchised), janitorial service workers at an office park, landscaping employees at a country club, staffing agency employees at a packaging company, a large national chain that requires its suppliers to sign a code of conduct, a global hotel franchisor and one of its hotel franchisees, and a subcontractor in a large retail store.

If there is a “joint employer” relationship under the FLSA, then both employers can be legally responsible for any violations of the law. In addition, employees who work for joint employers are entitled to pay for all hours worked for both employers, meaning that they are much more likely to be entitled to overtime pay in a given workweek.

We recommend reading these examples to get a sense of how the DOL intends to implement its new regulations. The following come directly from the proposed regulations (bold in original; italics added). We have added topical headings to allow readers to go directly to the issues that concern them:

NO JOINT EMPLOYMENT: Employee works for
two separate franchisees in same national franchise;
no coordination.

(1) Example: An individual works 30 hours per week as a cook at one restaurant establishment, and 15 hours per week as a cook at a different restaurant establishment affiliated with the same nationwide franchise. These establishments are locally owned and managed by different franchisees that do not coordinate in any way with respect to the employee. Are they joint employers of the cook?

Application: Under these facts, the restaurant establishments are not joint employers of the cook because they are not associated in any meaningful way with respect to the cook’s employment. The similarity of the cook’s work at each restaurant, and the fact that both restaurants are part of the same nationwide franchise, are not relevant to the joint employer analysis, because those facts have no bearing on the question whether the restaurants are acting directly or indirectly in each other’s interest in relation to the cook.

JOINT EMPLOYMENT FOUND: Employee works at two restaurants with same owner; restaurants coordinate schedules and pay.

(2) Example: An individual works 30 hours per week as a cook at one restaurant establishment, and 15 hours per week as a cook at a different restaurant establishment owned by the same person. Each week, the restaurants coordinate and set the cook’s schedule of hours at each location, and the cook works interchangeably at both restaurants. The restaurants decided [sic] together to pay the cook the same hourly rate. Are they joint employers of the cook?

Application: Under these facts, the restaurant establishments are joint employers of the cook because they share common ownership, coordinate the cook’s schedule of hours at the restaurants, and jointly decide the cook’s terms and conditions of employment, such as the pay rate. Because the restaurants are sufficiently associated with respect to the cook’s employment, they must aggregate the cook’s hours worked across the two restaurants for purposes of complying with the Act.

NO JOINT EMPLOYMENT: Employees of janitorial service for office park, which pays fee for service and retains – but does not exercise – right to supervise performance.

(3) Example: An office park company hires a janitorial services company to clean the office park building after hours. According to a contractual agreement with the office park and the janitorial company, the office park agrees to pay the janitorial company a fixed fee for these services and reserves the right to supervise the janitorial employees in their performance of those cleaning services. However, office park personnel do not set the janitorial employees’ pay rates or individual schedules and do not in fact supervise the workers’ performance of their work in any way. Is the office park a joint employer of the janitorial employees?

Application: Under these facts, the office park is not a joint employer of the janitorial employees because it does not hire or fire the employees, determine their rate or method of payment, or exercise control over their conditions of employment. The office park’s reserved contractual right to control the employee’s [sic] conditions of employment does not demonstrate that it is a joint employer.

JOINT EMPLOYMENT FOUND: Employees of landscaping company who work for country club; country club has no contractual right to hire, fire, or supervise, but does so as a matter of practice; landscaping company fired one employee at urging of country club.

(4) Example: A country club contracts with a landscaping company to maintain its golf course. The contract does not give the country club authority to hire or fire the landscaping company’s employees or to supervise their work on the country club premises. However, in practice a club official oversees the work of employees of the landscaping company by sporadically assigning them tasks throughout each workweek, providing them with periodic instructions during each workday, and keeping intermittent records of their work. Moreover, at the country club’s direction, the landscaping company agrees to terminate an individual worker for failure to follow the club official’s instructions. Is the country club a joint employer of the landscaping employees?

Application: Under these facts, the country club is a joint employer of the landscaping employees because the club exercises sufficient control, both direct and indirect, over the terms and conditions of their employment. The country club directly supervises the landscaping employees’ work and determines their schedules on what amounts to a regular basis. This routine control is further established by the fact that the country club indirectly fired one of landscaping employees for not following its directions.

JOINT EMPLOYMENT FOUND: Employees of staffing agency
assigned to company that controls rates of pay,
supervises work, and controls schedules.

(5) Example: A packaging company requests workers on a daily basis from a staffing agency. The packaging company determines each worker’s hourly rate of pay, supervises their work, and uses sophisticated analysis of expected customer demand to continuously adjust the number of workers it requests and the specific hours for each worker, sending workers home depending on workload. Is the packaging company a joint employer of the staffing agency’s employees?

Application: Under these facts, the packaging company is a joint employer of the staffing agency’s employees because it exercises sufficient control over their terms and conditions of employment by setting their rate of pay, supervising their work, and controlling their work schedules.

NO JOINT EMPLOYMENT: Employers’ association
offers optional benefits to members’ employees.

(6) Example: An Association, whose membership is subject to certain criteria such as geography or type of business, provides optional group health coverage and an optional pension plan to its members to offer to their employees. Employer B and Employer C both meet the Association’s specified criteria, become members, and provide the Association’s optional group health coverage and pension plan to their respective employees. The employees of both B and C choose to opt in to the health and pension plans. Does the participation of B and C in the Association’s health and pension plans make the Association a joint employer of B’s and C’s employees, or B and C joint employers of each other’s employees?

Application: Under these facts, the Association is not a joint employer of B’s or C’s employees, and B and C are not joint employers of each other’s employees. Participation in the Association’s optional plans does not involve any control by the Association, direct or indirect, over B’s or C’s employees. And while B and C independently offer the same plans to their respective employees, there is no indication that B and C are coordinating, directly or indirectly, to control the other’s employees. B and C are therefore not acting directly or indirectly in the interest of the other in relation to any employee.

NO JOINT EMPLOYMENT: Company requires supply chain
to comply with code of conduct specifying minimum hourly wage
and promise to comply with law.

(7) Example:  Entity A, a large national company, contracts with multiple other businesses in its supply chain. As a precondition of doing business with A, all contracting businesses must agree to comply with a code of conduct, which includes a minimum hourly wage higher than the federal minimum wage, as well as a promise to comply with all applicable federal, state, and local laws. Employer B contracts with A and signs the code of conduct. Does A qualify as a joint employer of B’s employees?

Application: Under these facts, A is not a joint employer of B’s employees. Entity A is not acting directly or indirectly in the interest of B in relation to B’s employees—hiring, firing, maintaining records, or supervising or controlling work schedules or conditions of employment. Nor is A exercising significant control over Employer B’s rate or method of pay—although A requires B to maintain a wage floor, B retains control over how and how much to pay its employees. Finally, because there is no indication that A’s requirement that B commit to comply with all applicable federal, state, and local law exerts any direct or indirect control over B’s employees, this requirement has no bearing on the joint employer analysis.

NO JOINT EMPLOYMENT: Franchisor licenses franchisee’s brand
and provides sample HR forms,
but franchisee is solely responsible
for controlling all terms and conditions of employment.

(8) Example: Franchisor A is a global organization representing a hospitality brand with several thousand hotels under franchise agreements. Franchisee B owns one of these hotels and is a licensee of A’s brand. In addition, A provides B with a sample employment application, a sample employee handbook, and other forms and documents for use in operating the franchise. The licensing agreement is an industry-standard document explaining that B is solely responsible for all day-to-day operations, including hiring and firing of employees, setting the rate and method of pay, maintaining records, and supervising and controlling conditions of employment. Is Franchisor A a joint employer of Franchisee B’s employees?

Application: Under these facts, A is not a joint employer of B’s employees. A does not exercise direct or indirect control over B’s employees. Providing samples, forms, and documents does not amount to direct or indirect control over B’s employees that would establish joint liability.

NO JOINT EMPLOYMENT: Retail store allows cell phone repair company to operate in its building, requires repair company employees to wear certain shirts, and requires repair company to enforce code of conduct.

(9) Example: A retail company owns and operates a large store. The retail company contracts with a cell phone repair company, allowing the repair company to run its business operations inside the building in an open space near one of the building entrances. As part of the arrangement, the retail company requires the repair company to establish a policy of wearing specific shirts and to provide the shirts to its employees that look substantially similar to the shirts worn by employees of the retail company. Additionally, the contract requires the repair company to institute a code of conduct for its employees stating that the employees must act professionally in their interactions with all customers on the premises. Is the retail company a joint employer of the repair company’s employees?

Application: Under these facts, the retail company is not a joint employer of the cell phone repair company’s employees. The retail company’s requirement that the repair company provide specific shirts to its employees and establish a policy that its employees to wear [sic] those shirts does not, on its own, demonstrate substantial control over the repair company’s employees’ terms and conditions of employment. Moreover, requiring the repair company to institute a code of conduct or allowing the repair company to operate on its premises does not make joint employer status more or less likely under the Act. There is no indication that the retail company hires or fires the repair company’s employees, controls any other terms and conditions of their employment, determines their rate and method of payment, or maintains their employment records.

Comments on the proposed regulations will be accepted for 60 days after publication in the Federal Register. If you have any questions about the proposed regulations, or any other FLSA issue, please contact any member of Constangy’s Wage and Hour Compliance & Litigation Practice Group.

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