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INSIGHT: New Joint Employer Rules—What You Need to Know

May 8, 2020, 8:00 AM

Joint employment can have significant consequences for employers, as each employer can be held jointly and severally liable for wage and hour obligations, including payment of minimum wages and overtime.

The U.S. Department of Labor and the National Labor Relations Board recently both issued new joint employer rules to clarify when two employers may be joint employers. The DOL’s rule under the Fair Labor Standards Act (FLSA) went into effect on March 16, and the NLRB’s new rule under the National Labor Relations Act (NLRA) went into effect on April 27.

While the NLRA typically affects only unionized employees, non-unionized employees and their working conditions have been impacted by NLRB decisions in the past several years. With that in mind, here is what you need to know.

Department of Labor Rule

The DOL’s joint employment rule explores two particular scenarios:

  1. whether joint employment exists when one employer benefits from the work of another employer’s employee; and
  2. whether hours worked should be aggregated when an employee works for more than one employer in a workweek.

The DOL has adopted a four-factor balancing test (the Bonnette test) to assess whether two employers are joint employers when one benefits from the work of the other’s employee. The factors that must be considered are whether the other employer:

  1. hires or fires the employee;
  2. supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
  3. determines the employee’s rate and method of payment; and
  4. maintains the employee’s employment records (though this factor alone will not demonstrate joint employer status).

The balancing test is fact sensitive and no single factor is dispositive of joint employer status. Importantly, the other entity or putative employer must actually exercise, directly or indirectly, one or more of the four factors. The ability, power, or reserved right alone does not demonstrate joint employer status without actually exercising some control. But understand, a reserved right to act can be a factor that is taken into consideration, as can other factors not listed as part of the four factors.

The DOL’s rule also clarifies that when two entities are found to be joint employers, an employee’s time worked for each must be aggregated for the purposes of paying minimum wages and overtime under the FLSA. However, “if the employers are acting independently of each other and are disassociated with respect to the employment of the employee, each employer may disregard all work performed by the employee for the other employer in determining its liability under the FLSA.”

The rule also explains factors that are not relevant to determining a joint employer relationship. For example, factors such as economic dependence, whether a job requires a special skill, whether the employee has an opportunity for profit or loss, whether the employee invests in equipment or materials for work, and other contractual relationships are not relevant to determining a joint employer relationship. Further, certain business models, such as franchise models, will not make a joint employer relationship more or less likely under the FLSA.

National Labor Relations Board Rule

The NLRB restored the pre-Browning-Ferris test for determining the joint employer standard in its new Final Rule and provided much-needed definitions for key terms. In Browning-Ferris, the NLRB held that it would not require proof that an entity exercised “direct and immediate” control over the essential terms and conditions of another employer’s employees to be considered a joint employer.

This decision caused confusion among employers because an entity could be considered a joint employer even where the control was indirect, limited and routine, or never exercised. The contractual reservation of the right to exercise control over certain terms of employment for those other employees was sufficient in some circumstances to create or contribute to the finding of joint employment.

The change reinstitutes the earlier standard and provides for a fact-specific inquiry. In the new rule, an “entity must possess and exercise such substantial direct and immediate control over one or more essential terms or conditions of their employment as would warrant finding that the entity meaningfully affects matters relating to the employment relationship with those employees.”

“Substantial and immediate control means direct and immediate control that has a regular or continuous consequential effect on an essential term or condition of employment of another employer’s employees.” It does not include “sporadic, isolated, or de minimus” acts of control.

Indirect control or contractually reserved but unexercised authority will not be entirely disregarded, however, as it may have probative value. Indirective control is defined as “control over essential terms and conditions of employment of another employer’s employees but not control or influence over setting the objectives, basic ground rules, or expectations for another entity’s performance under a contract.

Essential terms and conditions of employment means “wages, benefits, hours of work, hiring, discharge, discipline, supervision, and direction.”

An important consistent trait in both the DOL’s and the NLRB’s rules is that the putative joint employer will need to actually exercise control over the essential terms and conditions of employment for the employees in question to be considered joint employers. Reservation of the right to control or a static but unexercised ability to control may still be taken into consideration among other factors but is no longer a key factor to determining a joint employer relationship.

Key Takeaways for Employers

The new DOL rule is a win for some employers, particularly employers such as franchisors and staffing agencies. For example, the rule clarifies that a staffing agency that places employees at a workplace would not be liable under the FLSA if they do not exert the control envisioned by the four-factor test. Joint employment will continue to be an issue that impacts a majority of the businesses in the U.S., particularly with a booming gig economy.

Merely providing specific health and safety standards for, or a sample employee handbook to, non-employees who work on site may not make an entity a joint employer. Similarly, according to the DOL’s commentary, typical background checks are not likely to not make the entity an employer.

Employers should evaluate their contractual relationships, agreements and policies to confirm that they do not inadvertently lead to a joint employment relationship. Importantly, review relationships with non-employee personnel (such as contractors) to ensure that they are not subject to control. Employers should consult with counsel on these matters.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Michael Hepburn is a partner in the Employee Benefits and Executive Compensation practice at Eversheds Sutherland, resident in Washington, D.C. He counsels clients on a broad range of compensation, employment and benefits issues.

Deepa Menon is an associate in the Employee Benefits and Executive Compensation practice at Eversheds Sutherland, resident in Washington, D.C. She focuses her practice on a variety of labor and employment matters.

Bonnie Burke is a staff attorney in the Employee Benefits and Executive Compensation practice at Eversheds Sutherland, resident in Atlanta. She represents employers in a broad range of employment and labor law matters under federal and state laws.