Articles

BNA
March 9, 2016

In today’s economy, many companies are staffing through lease or temp agencies, third party management companies, independent contractors, and by sharing employees between companies. Many of these arrangements result in third-parties employing the workers and not the company on whose behalf the work is being performed (the putative joint employer).  These arrangements generally allow the putative joint employer to minimize or even avoid functions such as recruiting, screening, hiring, paying workers, and complying with labor and employment laws.  Over the last few years, government agencies have reacted to this trend by increasingly finding that both companies are employers and as such, both are jointly and severally liable for any issue involving the employees.  The National Labor Relations Board and OSHA are already on board, and now the federal Department of Labor (“DOL”), is joining the movement.

Last month, the DOL issued administrative guidance on this issue; this guidance is not law but rather the DOL’s interpretation of the law and explanation on how the DOL intends to enforce it. The DOL’s legal analysis focuses on the joint employer provisions already existing in both the Fair Labor Standards Act (“FLSA” – the federal wage and hour watchdog) and the Migrant and Seasonal Agricultural Worker Protection Act (“MSPA”).  Although the MSPA is not applicable to many employers, the DOL nonetheless uses its joint employer provisions to establish the DOL’s joint employer analysis.

The guidance begins by focusing on the fact that because the word “employ” is defined so broadly by the FLSA and MSPA (“to suffer or permit to work”) that a wide range of companies related to the employment of workers might be considered joint employers. Next, the guidance introduces the two main categories of joint employment that determine what legal test is used in the analysis – horizontal or vertical joint employment.

Horizontal joint employment exists where an employee has a relationship with two companies that are related or associated with each other such that they both employ the worker. The focus is the relationship that the two companies have with each other (e.g., two restaurants that share employees) rather than either employer’s relationship with the employee.  Vertical joint employment exists where the employee has a relationship with one employer but he or she is economically dependent (paid by) the other entity.  The focus is the relationship between the employee and the two companies (e.g., staffing agencies, labor providers, etc.).

Horizontal Joint Employment

For horizontal joint employment to be found, two (or more) companies must be associated in some way with one another, such as sharing employees, one company acting in the interest of the other company as it relates to employment, or one company controlling the employment of a worker at another company. Where two companies are totally separate and unrelated, joint employer status is extremely unlikely.

According to the guidance, the horizontal joint employer factors that will be considered are:

• who owns the potential joint employers (i.e., does one employer own part or all of the other employer (e.g., parent subsidiary relationship) 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 regarding the workers.

Although not every factor must be met, the more factors that are present the more likely a finding of joint employer.

Vertical Joint Employment

For vertical joint employment to be found, two companies generally have an agreement or arrangement whereby one company supplies employees to the other (the latter being the putative joint employer since the employee actually performs work for this entity). However, before beginning the joint employer analysis, be sure the workers are not actually employees misclassified as independent contractors. If this is the case, you will never get to a joint employer analysis but rather merely an employer analysis.

Assuming the workers are not employees, the next step is to perform an economic realities test. The key to this analysis is whether the worker is economically dependent on the putative joint employer.  The MSPA sets forth a seven-factor economic realities test (see below) although different jurisdictions and different agencies use different versions of this same idea.

• who directs, controls, or supervises the work performed;
• who controls employment conditions (e.g., pay rate, schedules);
• the permanency and duration of relationship (i.e., the more definite/full-time the relationship between employee and putative joint employer, the more likely a joint employer finding);
• whether the nature of the work is repetitive and rote (i.e., the more the employee’s work is repetitive, rote, and unskilled, the more likely a joint employer finding);
• whether the work is integral to the business (i.e., the more the employee’s work is integral to the business of the putative joint employer, the more likely a joint employer finding);
• whether the work is performed on premises; and
• who performs administrative functions commonly performed by employers (i.e., the more the putative joint employer performs administrative functions such as payroll or workers’ compensation, the more likely a joint employer finding).

Again, although not every factor must be met, the more factors found the more likely a finding of joint employment.

Consequences of Joint Employer Findings

Legally, whether horizontal or vertical joint employment exists, the result is the same – both companies are held jointly and severally liable for any wage and hour violation. This oftentimes includes civil penalties and additional damages including up to 100% of the unpaid back pay. Additionally, for companies sharing employees, overtime must be determined based on the combined hours the employee worked at both employers. This can result in large amounts of unpaid overtime. Worse yet, a finding of joint employment in one discipline may lead to a finding in other disciplines; the National Labor Relations Act, OSHA are already on board – but who is next?

Practically, many employers have agreements with temp agencies/staffing companies stating that the agencies are responsible for compliance with all labor and employment laws. Assuming the agreement is enforceable, the potential joint employer would not be liable for any violations although they would still be considered a joint employer. But if one employer goes out of business, the other one will be left holding this very expansive bag!

Conclusion

With government agencies and courts taking expansive views of joint employment and vigorously enforcing this issue, we expect more and more companies will be deemed joint employers. The DOL’s guidance already lists the first industries the DOL will attack – construction, agricultural, janitorial, warehouse and logistics, staffing and hospitality.

Employers who share employees between businesses or have arrangements with temp agencies and labor providers should think strategically about structuring the arrangement and the agreement before entering into it so as to avoid a joint employer finding. Further, companies that are franchisor-franchisees and parent-subsidiaries would be well-served to re-examine those relationships in light of changing law.

Robert G. Brody is the founder of Brody and Associates, LLC. Abby M. Warren is an associate at the firm.  Brody and Associates represents management in employment and labor law matters and has offices in Westport and New York City.