The U.S. Department of Labor (DOL) recently announced its makeover of the rule defining joint employer status under the Fair Labor Standards Act (FLSA). The final rule becomes effective March 16, 2020 and clarifies when employers can be held jointly and severely liable for wage and hour violations under the FLSA.
The FLSA requires employers to pay employees at least the federal minimum wage and overtime for every hour worked over 40 in a workweek, unless the employee is exempt from such requirements. The FLSA defines “employer” as “any person acting directly or indirectly in the interest of an employer in relation to the employee.” This definition opens the door for an employee to have one or more joint employers who may be liable for wage and hour violations.
This issue came to the forefront in recent years after a class action was filed against McDonald’s Corporation. The class members brought suit against a franchise company that operated eight McDonald’s franchises in California. They alleged they were denied overtime and meal and rest breaks. They further alleged that McDonald’s and its franchisees were joint employers for purposes of wage and hour liability. The case was appealed to the U.S. Court of Appeals in the Ninth Circuit which ruled in favor of McDonald’s on the issue of joint employer liability.
Under the new rule, the DOL addresses situations where an individual works for one employer, but another individual or entity simultaneously benefits from that work. The DOL has adopted a four-factor balancing test to determine whether joint employer liability may be imposed. The analysis focuses on whether the joint employer entity is directly or indirectly controlling the worker based on the following factors:
- Whether the entity hires or fires the worker;
- Whether the entity supervises or controls the work schedule or conditions of employment to a substantial degree;
- Whether the entity determines the worker’s rate of compensation or method of payment; and
- Whether the entity maintains the employment records for the worker.
The weight given to each factor will vary depending on the circumstances of the case. The new rule identifies several factors that are not relevant in determining joint employer status under the FLSA:
- Whether the worker is “economically dependent” on the potential joint employer;
- Whether the entity is operating as a franchisor or operates using a similar business model;
- The fact that there is an agreement between an entity and the employer requiring the employer to comply with certain legal obligations or meet certain standards to protect the health and safety of workers or the public;
- The fact that there is an agreement between an entity and the employer that imposes quality control standards to ensure the consistent quality of the work product, brand or business reputation;
- The fact that the entity may provide the employer a sample handbook, or other forms, assisting with the employer’s operation of its business.
The new standard is particularly important for franchisee relationships, portfolio membership companies and employers who rely upon temporary staffing agencies for services. An entity can demand basic standards from service providers, suppliers or franchisees, like requiring them to adopt effective anti-harassment policies and comply with employment laws, without being deemed an employer under the FLSA.
Because the DOL has characterized the rule as “interpretative,” the courts will have some discretion when applying the new standard. It is important to note that joint employer standards may vary under state law. Furthermore, the National Labor Relations Board (NLRB) is considering a new joint employer standard for labor practices and labor relations.