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Understanding the Department of Labor's New Interpretation of Joint Employer Liability

Employers may face significantly greater legal exposure following a new Department of Labor (DOL) Administrative Interpretation (AI) concerning joint employment liability under the Fair Labor Standards Act (FLSA). The January 20 decision has not been adopted by the courts at this time.

The new interpretation follows a similar interpretation by the DOL last July, when the agency concluded that employees are routinely mischaracterized as independent contractors for purposes of the FLSA. The two interpretations signal the DOL's commitment to remedy the perceived problem of employers failing to properly compensate employees for all hours worked and, specifically, for all overtime employees claim to have worked.

What is Joint Employment?

Joint employment liability occurs when an employee is doing work simultaneously for two or more employers. When two or more employers jointly employ an individual, the employee’s salaries for all of the joint employers during the work week are aggregated and considered one employment, including for calculating overtime pay.

The DOL’s Expanded View of Joint Employer Liability

The AI articulates a new and far more expansive approach to determining when joint employment liability exists. The current FLSA regulation describes three situations where joint employer liability may be found: (1) when there is an arrangement between the employers to share the employee’s services, (2) when one employer is directly or indirectly acting in the interest of a second employer with respect to the worker, and (3) when the prospective employer indirectly or directly controls the employment of the worker.

Presently, there is not uniformity in the federal circuits regarding when joint employment liability exists. Until now, the prevailing view appeared to be for a second employer to be deemed a joint employer, some level of control by a second employer over the employee (either indirect or direct) needed to exist.

In its new AI, the DOL explains that joint employment liability can exist “horizontally" or “vertically." Horizontal joint liability exists when two or more employers employ an individual, and they are sufficiently associated to each other with respect to the employee. For example, a horizontal joint liability exists when an employee is shared by managers of two restaurants under the same restaurant brand, the same payroll processor is used for the employee, and the restaurants share supervisory authority over the employee.

Far more controversial is the DOL’s discussion of “vertical” joint employment liability. The AI describes vertical joint employment as existing when an employee of one employer (referred to as an intermediary employer in the AI) is also economically dependent on a second employer. The AI explains that, unlike the situation that exists with respect to horizontal joint employers, the focus of vertical joint employment is the employee's relationship with the potential joint employer, and whether that potential joint employer employs the employee. The AI provides examples of situations where vertical joint employment might arise, including nurses placed by hospital staffing agencies, and warehouse workers whose labor is arranged and overseen by layers of intermediaries between the workers and the owner or operator of the warehouse facility.

The AI also contains the following troubling 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.

This illustrates the DOL’s view that often conventional general contractor-subcontractor relationships raise the possibility of joint employment relative to an employee(s).

In a bizarre twist of reasoning, the DOL explains that courts, in analyzing whether joint employment exists for purposes of the FLSA, should consider factors used under a completely different statute, the Migrant and Seasonal Agricultural Worker Protection Act (MSPA). These factors include:

• The nature and extent of the control or supervision of the work performed.
• Whether the potential joint employer can control employment conditions (i.e., hire or fire the employee, modify working conditions).
• The permanency and duration of the relationship.
• The repetitive and rote nature of the work.
• Whether the employee’s work is integral to the potential joint employer's business.
• Whether the employer's work is performed on the premises owned or controlled by the potential joint employer.
• Whether the potential joint employer performs administrative functions for the employees commonly performed by employers, such as handling payroll, providing worker’s compensation insurance, safety equipment, and transportation materials.

According to the DOL, courts should apply these seven factors even though courts “have not explicitly relied on the MSPA regulation.”

Conclusion and Recommendations

Although it is unclear whether and to what extent courts will adopt the new AI, lawyers for employees will likely seize upon the AI as an additional basis for attempting to impose joint liability on as many employers as possible. In its July 2015 administrative interpretation, the DOL solidified its view that most individuals should be considered employees under the broad definitions set forth under the FLSA. The new AI solidifies the DOL’s view that joint employment liability should exist in far more situations than employers or their business advisors would have imagined.

In light of the 2015 AI and the new January 2016 AI, it is incumbent upon employers to be proactive, not only in properly classifying individuals, but also in anticipating situations where joint liability might be found. Specifically, employers should consider the following:

(1) Regularly review job descriptions to make sure that they comport with an individual's actual job duties.

(2) Regularly monitor the number of hours individuals are working to determine whether any are working overtime.

(3) Recognize that despite the wishes of certain individuals to be treated as independent contractors, in most instances they will be deemed employees at least for purposes of the FLSA.

(4) Be mindful of the fact that an individual can be considered an employee for purposes of one employment statute and an independent contractor for purposes of another.

(5) Review insurance policies to maximize insurance coverage in the event of an inadvertent misclassification and/or in the event that joint employment liability is deemed to exist.

(6) Carefully review business relationships and business agreements to define roles and responsibilities, particularly as they relate to employees, to determine whether the possibility of joint employer status exists.

(7) If the possibility of joint employer status exists, consider including appropriate indemnification language.

Marc Engel is an employment attorney and litigator at Lerch, Early & Brewer who advises managers of all types on employment issues, and provides strategies for preventing, defending, and resolving wage and hour claims. For more information about the Department of Labor's New Intepretation of Joint Employer Liability, contact Marc at (301) 657-0184 or mrengel@lerchearly.com.

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