Beyond Control: The Expanding Definition of Joint Employment under the Fair Labor Standards Act

October 18, 2016 Firm News

A Laurie & Brennan article featured in the Construction Law Corner, Summer, 2016, eNewsletter.

by Thomas Reuland

On January 20, 2016, the Wage and Hour Division of the Department of Labor (DOL) issued an Administrator’s Interpretation (AI) concerning joint employment under the Fair Labor Standards Act (FLSA).[1] The FLSA broadly defines an employment relationship.   If an employment relationship exists, the FLSA imposes a wide range of regulations. Joint employment, the DOL’s recent AI emphasizes, goes one step further by triggering compliance responsibilities for each employer within a joint employment relationship. While this shared responsibility under a joint employment relationship offers additional legal protections to employees, it also can have surprising ramifications for employers that operate under the mistaken belief that they are not jointly responsible for compliance with the FLSA’s regulations.

This Article explains the scope of employment and joint employment under the FLSA, reviews two forms of joint employment that the DOL’s recent AI describes–horizontal joint employment and vertical joint employment–and concludes by describing potential consequences of the DOL’s new AI for the construction industry.

Joint Employment under the FLSA

The FLSA governs some of the most fundamental elements of the relationship between an employer and employee, including rules about minimum wage, the forty-hour workweek, and when overtime pay is justified. Moreover, the FLSA features an extraordinarily broad definition of what it means to be an employee or employer covered under the Act. An employee is “any individual employed by an employer,”[2] while an employer is “any person acting directly or indirectly in the interest of an employer in relation to an employee,”[3] and “employ” means “to suffer or permit to work.”[4] These definitions are uniquely broad. Indeed, the Supreme Court has described the definition of employment under the FLSA as “the broadest definition that has ever been included in any one act.”[5]

Joint employment occurs when two or more employers employ an employee.[6] The employers in a joint employment relationship are jointly and severally liable for compliance with the FLSA.[7] This joint and several liability can mean, for example, that one employer in a joint employment relationship is responsible for paying an employee’s overtime wages if that employee has already worked a full workweek with another joint employer.

Under the FLSA, courts apply an economic realities test to identify employment and joint employment relationships. Notably, the economic realities test is a dramatic departure from the common law standard for identifying employment relationships.[8] Under the common law, a control analysis identifies an employment relationship, examining the type and extent of control a potential employer has over a potential employee.[9] Under the FLSA, economic realities–not just control–determine employment.[10]

The economic realities test examines whether a worker is economically dependent on a potential employer.[11] If economic dependence is apparent, then the worker is an employee. Courts look to the totality of the circumstances when assessing the economic realities of a given situation.[12] However, some of the important factors to consider include:

 ·                 The nature and degree of the putative employer’s control as to the manner in which the work is performed;

 ·                 The putative employee’s opportunity for profit or loss depending upon his/her managerial skill;

 ·                 The putative employee’s investment in equipment or materials required for the task, or the putative employee’s employment of other workers;

 ·                 Whether the services rendered by the putative employee require special skill;

 ·                 The degree of permanency and duration of the working relationship; and

 ·                 The extent to which the services rendered by the putative employee are an integral part of the putative employer’s business.[13]

Given how broad the economic realities test can be, coupled with the broad definition of employment under the FLSA, the DOL’s recent AI concedes that the FLSA has an expansive reach over many business relationships by virtue of joint employment.[14] The AI distills the most frequent joint employment relationships into two common scenarios: horizontal joint employment and vertical joint employment.

Joint employment is “horizontal” when two different employers separately employ an employee but share sufficient associations with each other to the point that they are both jointly responsible to the employee under the FLSA.[15] Joint employment is “vertical” when an employee of one employer is economically dependent on a second employer, even if the first and second employer are not technically intertwined in an employment relationship with each other.[16] As the next sections of this Article explain, the recent AI provides further guidance on horizontal and vertical joint employment.

Horizontal Joint Employment

Horizontal joint employment arises when two or more employers share close associations to the extent that “an employee is employed by two (or more) technically separate but related or overlapping employers.”[17] Determining whether horizontal joint employment exists requires an examination of the ties between two or more potential joint employers as opposed to an examination of the relationship between a potential employer and a potential employee. The DOL’s recent AI offers a number of nonexclusive factors to identify horizontal joint employers. Those factors include:

 ·                 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.[18]

The more associations the employers share, the more likely they will be joint employers.

Vertical Joint Employment

While horizontal joint employment depends upon the relationship between two or more potential joint employers, vertical joint employment depends upon the relationship between an employee and a potential joint employer. Vertical joint employment exists when an employee of one employer is, based on an economic realities test, economically dependent on a second employer during that employee’s work for the first employer.[19] For instance, a worker could be an employee for both an independent contractor and, based on the economic realities of the job, also be an employee of the general contractor who retained the independent contractor.[20]

According to the DOL’s AI, factors that can indicate whether an employee is economically dependent on a potential joint employer include:

 ·                 The extent to which a potential joint employer directs, controls or supervises an employee’s work;

 ·                 The extent to which a potential joint employer can modify fundamental conditions of employment such as setting wages and hiring or firing the employee;

 ·                 The “permanency and duration” of the relationship between the potential joint employer and the employee;

 ·                 The degree of skill or training required for the employee to perform the work;

 ·                 Whether the employee’s work is “integral” to the potential joint employer’s business;

 ·                 Whether the potential joint employer owns or controls the premises where the employee works; and

 ·                 The extent to which a potential joint employer performs “administrative functions commonly performed by employers” such as payroll, providing safety equipment and insurance, or tool and materials for the job.[21]

Implications for the Construction Industry

Many construction projects involve multiple layers of contractors, subcontractors, and consultants. Yet in the eyes of the law, a title alone, like “independent contractor,” does not always correspond with the actual employment relationships at play, especially within an industry that utilizes complex staffing models and contractual relationships.[22] “The traditional employment relationship of one employer employing one employee is less prevalent,” the DOL warns, which has led to the rise of employment relationships where more than one employer is responsible for an employee under the FLSA.[23] While joint employment offers additional protections to employees, it also presents additional risks to employers who rely on labor and work downstream. Under the AI’s guidance, employees can seek the protections of the FLSA–such as overtime and unpaid wages–from an expanding list of upstream employers on a project.

Meanwhile, joint employers bear the responsibility for an employee jointly and severally. Joint and several responsibility for compliance with the FLSA can lead to situations in which one employer’s insolvency shifts the responsibility for FLSA compliance entirely onto the solvent joint employer. For instance, if an independent contractor goes out of business and the general contractor is a joint employer of the independent contractor’s employee, then the general contractor could bear the entire burden of complying with the FLSA. Or, if that same employee works thirty hours for one joint employer, while working twenty hours for another joint employer within the same week, then both employers can be responsible for that employee’s overtime.

To avoid such a burden, upstream employers must avoid a relationship of economic dependence with an employee based on the economic realities test. The economic realities test itself, however, can vary depending on where the FLSA claim arises. Indeed, not all courts agree on which factors constitute the test for economic dependence.[24] The statutory and regulatory law does not offer clear guidance either. As the DOL admits, the factors used in the economic realities test under the FLSA stem from a different act, the Migrant and Seasonal Agricultural Worker Protection Act (MSPA). Although the FLSA and MSPA are related, they remain separate legislation and the bulk of the DOL’s statutory interpretation of joint employment found within the Code of Federal Regulations is yet to codify the analysis of economic realities from the DOL’s AI.[25]

This uncertainty leaves upstream employers in a difficult position. If an employer is unwittingly in a joint employment relationship, they might unexpectedly find themselves liable for fulfilling FLSA’s obligations on behalf of another employer. An employer can attempt to avoid joint and several responsibility by carefully delineating its distinct and independent position on a project from all other potential joint employers involved. Conversely, an employer can embrace the possibility of being a joint employer and potentially reduce its exposure to liability through strong contract provisions, such as indemnity provisions or clauses that shift the economic dependence of potential employees to other parties. Ultimately, just as the structure of today’s workplace has grown more complicated, so too has the analysis that determines who is an employer and who is an employee.

 


[1] See Administrator’s Interpretation No. 2016-1, “Joint employment under the Fair Labor Standards Act and Migrant and Seasonal Agricultural Worker Protection Act” (Joint Employment AI), available at http://www.dol.gov/whd/flsa/Joint_Employment_AI.pdf.

[2] 29 U.S.C. 203(e)(1).

[3] 29 U.S.C. 203(d).

[4] 29 U.S.C. 203(g).

[5] U.S. v. Rosenwasser, 323 U.S. 360 n.3 (1945).

[6] See 29 C.F.R. 791.2(a).

[7] See 29 C.F.R. 791.2(a) (when two or more employers are joint employers, “all joint employers are responsible, both individually and jointly, for compliance with all of the applicable provisions of the act”).

[8] As the DOL observed, “The concepts of employment and joint employment under the FLSA […] are notably broader than the common law concepts of employment and joint employment, which look to the amount of control that an employer exercises over an employee.” Joint Employment AI at 4. See Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 326 (1992) (noting that FLSA’s definition of employment is broader than “traditional agency law principles”); Torres-Lopez v. May, 111 F.3d 633, 639 (9th Cir. 1997) (noting that joint employment under the FLSA “should be defined expansively”).

[9] As the DOL wrote in a previous Administrator’s Interpretation, “Unlike the common law control test, which analyzes whether a worker is an employee based on the employer’s control over the worker and not the broader economic realities of the working relationship, the ‘suffer or permit’ [definition of employment] broadens the scope of employment relationships covered by the FLSA.” Administrator’s Interpretation No. 2015-1, “The Application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who Are Misclassified as Independent Contractors” (Misclassification AI) at 3, available at http://www.dol.gov/whd/workers/Misclassification/AI-2015_1.pdf.

[10] See, e.g., Tony & Susan Alamo Found. v. Sec’y of Labor, 471 U.S. 290, 301 (1985) (noting that the FLSA identifies employment relationships based on economic realities).

[11] See Charles v. Burton, 169 F.3d 1322 (11th Cir.), cert. denied, 528 U.S. 879 (1999); Lopez v. Silverman, 14 F. Supp. 2d 405 (S.D.N.Y. 1998); Administrator’s Interpretation No. 2014-2, “Joint Employment of Home Care Workers in Consumer-Directed, Medicaid-Funded Programs by Public Entities under the Fair Labor Standards Act” (Home Care AI), at 2, available at http://www.dol.gov/whd/opinion/adminIntrprtn/FLSA/2014/FLSAAI2014_2.pdf.

[12] See Goldberg v. Whitaker House Cooperative, Inc., 366 U.S. 28, 33 (1961); Rutherford Food Corp. v. McComb, 331 U.S. 722, 730 (1947).

[13] 29 CF 500.20(h); see generally Misclassification AI (discussing factors of the economic realities test with case law support).

[14] See Joint Employment AI at 1.

[15] Joint Employment AI at 1-2, 5.

[16] Joint Employment AI at 5.

[17] Joint Employment AI at 7.

[18] Joint Employment AI at 8. The DOL provides additional discussion and guidance regarding horizontal employment in Opinion Letters from the WHD on June 14, 2005 (available at 2005 WL 6219105) and April 11, 2005 (available at 2005 WL 2086804).

[19] Joint Employment AI at 10-11.

[20] The Joint Employment AI includes such an example:

A laborer is employed by ABC Drywall Company, which is an independent subcontractor on a construction project. ABC Drywall was engaged by the General Contractor to provide drywall labor for the project. ABC Drywall hired and pays the laborer. The General Contractor provides all of the training for the project. The General Contractor also provides the necessary equipment and materials, provides workers’ compensation insurance, and is responsible for the health and safety of the laborer (and all of the workers on the project). The General Contractor reserves the right to remove the laborer from the project, controls the laborer’s schedule, and provides assignments on site, and both ABC Drywall and the General Contractor supervise the laborer. The laborer has been continuously working on the General Contractor’s construction projects, whether through ABC Drywall or another intermediary. These facts are indicative of joint employment of the laborer by the General Contractor.

Joint Employment AI at 14 (emphasis in the original).

[21] See Joint Employment AI at 11-12; see also 29 C.F.R. 500.20(h)(5)(iv) (describing elements of the economic realities test).

[22] See Misclassification AI at 5.

[23] Joint Employment AI at 1.

[24] The economic realities test followed by one jurisdiction is not necessarily the same in another. Compare Zheng v. Liberty Apparel Co., 355 F.3d 61, 71-72 (2d Cir. 2003), with Perez v. Lantern Light Corp., 2015 WL 3451268, at *2-17 (W.D. Wash. May 29, 2015) (describing a hybrid approach followed within the Ninth Circuit and discussing case examples).

[25] See 29 C.F.R.  § 791.2 (statement of general policy or interpretation regarding joint employment relationships under the FLSA).