On April 1, 2019, the U.S. Department of Labor issued proposed regulations clarifying its interpretation of joint employer status under the Fair Labor Standards Act. Recently, the DOL issued a Final Rule, which will take effect March 16.

This Bulletin will highlight only the changes that the DOL made to its proposed regulations. For a complete understanding of the new standard, please read this bulletin with the one we published in April.

Four-factor test survives, with tweaks

The DOL kept its proposed four-factor test to determine whether an entity would be considered a “joint employer” under the FLSA, but it modified the language in a way that will make a finding of “joint employer” status less likely. (The new language is in italics below.) An employer will be found to be a joint employer if it

• Hires or fires the employee,
• Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree,
• Determines the employee’s rate and method of payment, and
• Maintains the employee’s employment records.

According to the comment accompanying the Final Rule, “no single factor is dispositive in determining joint employer status, and the appropriate weight to give each factor will vary depending on the circumstances.”

The DOL has also added a definition of “employment records,” which was not included in the proposed regulations:

“Employment records” means records, such as payroll records, that reflect, relate to, or otherwise record information pertaining to the hiring or firing, supervision and control of the work schedules or conditions of employment, or determining the rate and method of payment of the employee. Except to the extent they reflect, relate to, or otherwise record that information, records maintained by the potential joint employer related to the employer’s compliance with the contractual agreements identified in paragraphs (d)(3) and (4) of this section do not make joint employer status more or less likely under the Act and are not considered employment records under this section. Satisfaction of the maintenance of employment records factor alone will not lead to a finding of joint employer status.

The Final Rule explicitly provides, “Standard contractual language reserving a right to act, for example, is alone insufficient for demonstrating joint employer status.”

“Indirect control”

The Final Rule includes a narrow definition of “indirect control”:

Indirect control is exercised by the potential joint employer through mandatory directions to another employer that directly controls the employee. But the direct employer’s voluntary decision to grant the potential joint employer’s request, recommendation, or suggestion does not constitute indirect control that can demonstrate joint employer status. Acts that incidentally impact the employee also do not indicate joint employer status.

Other important provisions

Finally, in Section 791.2(d), the proposed regulations were significantly revised to make the following changes:

• Public agencies can now be potential joint employers.
• A franchise relationship, a brand and supply agreement or a similar business model “does not make a finding of joint employer status more or less likely.”
• Requiring compliance with specific legal standards or health/safety requirements to protect employees or the public, or the monitoring and enforcing of such contractual commitments, “does not make joint employer status more or less likely.” This includes “mandating that employers comply with their obligations under the FLSA or other similar laws; or institut[ing] sexual harassment policies; requiring background checks; or requiring employers to establish workplace safety practices and protocols or to provide workers training regarding matters such as health, safety, or legal compliance. Requiring the inclusion of such standards, policies, or procedures in an employee handbook does not make joint employer status more or less likely under the Act.”
• Contractual agreements that require the potential joint employer to maintain quality control standards to ensure the consistent quality of the work product, brand or business reputation, or monitoring compliance with these types of agreements, “does not make joint employer status more or less likely under the Act.” The Final Rule says, “Such contractual agreements include, but are not limited to, specifying the size or scope of the work project, requiring the employer to meet quantity and quality standards and deadlines, requiring morality clauses, or requiring the use of standardized products, services, or advertising to maintain brand standards.”

Joint employment scenarios

The proposed regulations included nine examples in which a joint employer relationship might or might not be found to exist. The Final Rule added three new examples and dropped one (relating to a landscape business), for a total of 11.

The following three new examples come directly from the Final Rule (bold in original; italics added). We have added topical headings to allow readers to go directly to the issues that concern them:
 

NO JOINT EMPLOYMENT: Restaurant does not exercise significant direct
or indirect control over the terms and conditions of the cleaning company’s employees

(4) Example. A restaurant contracts with a cleaning company to provide cleaning services. The contract does not give the restaurant authority to hire or fire the cleaning company’s employees or to supervise their work on the restaurant’s premises. A restaurant official provides general instructions to the team leader from the cleaning company regarding the tasks that need to be completed each workday, monitors the performance of the company’s work, and keeps records tracking the cleaning company’s completed assignments. The team leader from the cleaning company provides detailed supervision. At the restaurant’s request, the cleaning company decides to terminate an individual worker for failure to follow the restaurant’s instructions regarding customer safety. Is the restaurant a joint employer of the cleaning company’s employees?

Application. Under these facts, the restaurant is not a joint employer of the cleaning company’s employees because the restaurant does not exercise significant direct or indirect control over the terms and conditions of their employment. The restaurant’s daily instructions and monitoring of the cleaning work is limited and does not demonstrate that the restaurant is a joint employer. Records of the cleaning team’s work are not employment records under paragraph (a)(1)(iv) of this section, and therefore, are not relevant in determining joint employer status. While the restaurant requested the termination of a cleaning company employee for not following safety instructions, the decision to terminate was made voluntarily by the cleaning company and therefore is not indicative of indirect control.
 

JOINT EMPLOYMENT: Restaurant exercises sufficient control, both direct
and indirect, over the terms and conditions of the cleaning company’s employees

(5) Example. A restaurant contracts with a cleaning company to provide cleaning services. The contract does not give the restaurant authority to hire or fire the cleaning company’s employees or to supervise their work on the restaurant’s premises. However, in practice a restaurant official oversees the work of employees of the cleaning company by assigning them specific tasks throughout each day, providing them with hands-on instructions, and keeping records tracking the work hours of each employee. On several occasions, the restaurant requested that the cleaning company hire or terminate individual workers, and the cleaning company agreed without question each time. Is the restaurant a joint employer of the cleaning company’s employees?

Application. Under these facts, the restaurant is a joint employer of the cleaning company’s employees because the restaurant exercises sufficient control, both direct and indirect, over the terms and conditions of their employment. The restaurant directly supervises the cleaning company’s employees’ work on a regular basis and keeps employment records. And the cleaning company’s repeated and unquestioned acquiescence to the restaurant’s hiring and firing requests indicates that the restaurant exercised indirect control over the cleaning company’s hiring and firing decisions.

NO JOINT EMPLOYMENT: Employees of staffing agency assigned to a packaging company are not jointly employed by the packaging company because the staffing agency exclusively determines the pay and work schedules for each employee

(7) Example. A packaging company has unfilled shifts and requests a staffing agency to identify and assign workers to fill those shifts. Like other clients, the packaging company pays the staffing agency a fixed fee to obtain each worker for an 8-hour shift. The staffing agency determines the hourly rate of pay for each worker, restricts all of its workers from performing more than five shifts in a week, and retains complete discretion over which workers to assign to fill a particular shift. Workers perform their shifts for the packaging company at the company’s warehouse under limited supervision from the packaging company to ensure that minimal quantity, quality, and workplace safety standards are satisfied, and under more strict supervision from a staffing agency supervisor who is on site at the packaging company. Is the packaging company a joint employer?

Application. Under these facts, the packaging company is not a joint employer of the staffing agency’s employees because the staffing agency exclusively determines the pay and work schedule for each employee. Although the packaging company exercises some control over the workers by exercising limited supervision over their work, such  supervision, especially considering the staffing agency’s supervision, is alone insufficient to establish that the packaging company is a joint employer without additional facts to support such a conclusion.

Analysis

The big question will be how the courts view and react to the Final Rule in future litigation. The Trump Administration has been open about its desire to nominate judicial appointees who are critical of deference to administrative interpretations. Recently, the Supreme Court in Kisor v. Wilkie narrowed the circumstances under which a court will defer to an agency’s interpretation of its own regulation. In this case, the Agency is interpreting a statute, not a regulation. Courts may follow an administrative agency’s interpretation of a statute administered by that agency if the agency can show that its interpretation is persuasive.

Nonetheless, some courts will follow and apply the Final Rule, while others may not. To be sure, employers should carefully consider conforming their practices to be in accord with the guidance contained in the Final Rule so that they can rely on the rule in the event of litigation. The November elections will also be a factor. Employee advocacy groups are already predicting that the Final Rule will be short-lived if a Democrat takes the White House next January. There is some level of debate over whether a new Secretary of Labor could undo the Final Rule without first going through notice and comment rulemaking. But even if change is not immediate, it is likely that a Secretary of Labor appointed by a Democratic President would take a dim view of the Final Rule and would ultimately change it.