Locke Lord QuickStudy: Department of Labor Finalizes Sweeping New Joint Employer Rules

For the first time in over 60 years, the United States Department of Labor (DOL) significantly ‎updated the standards it relies upon to determine joint-employer status under the Fair Labor ‎Standards Act (FLSA).  The new rule, which was first proposed in April of 2019, becomes ‎effective on March 16, 2020.  The DOL’s rationale for the rule is to “promote certainty for ‎employers and employees, reduce litigation, promote greater uniformity among court decisions, ‎and encourage innovation in the economy.”‎¹  According to Secretary of Labor Eugene Scalia, ‎‎“This final rule furthers President Trump’s successful, government-wide effort to address ‎regulations that hinder the American economy and to promote economic growth.”‎²

The final rule establishes a four-factor balancing test for determining joint-employer ‎status, examining whether a putative joint-employer: (1) may hire or fire the employee; (2) ‎substantially supervises and controls the employee’s work schedule or conditions of employment; ‎‎(3) determines the employee’s rate and method of payment; and (4) maintains the employee’s ‎employment records.  No single factor is dispositive, and the significance of each factor will vary ‎case-by-case; however, the final rule clarifies that mere maintenance of “employment records” ‎alone is not enough to establish joint-employer status.  The final rule defines “employment ‎records” as those 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 schedule or ‎conditions of employment, or determining the rate and method of payment to the employee. ‎

The final rule also clarifies that a putative joint-employer must actually exercise one or ‎more of the four factors.  A right to exercise control, without any actual exercise of such right, ‎will not establish a joint-employer relationship.  Moreover, the DOL makes clear that an ‎employee’s “economic dependence” on the potential joint-employer also is not determinative.  ‎Though courts in the past have analyzed “economic dependence” or the “economic realities” to ‎determine whether an individual qualifies as an employee, as opposed to an independent ‎contractor under the FLSA, the factors typically utilized to make this determination (such as skill ‎and initiative, opportunity for profit and loss, and relative investments) now are irrelevant to the ‎joint-employer inquiry according to the DOL.  ‎

Lastly, the final rule identifies practices that do not make joint-employer status more or ‎less likely.  Most notably, those practices include the franchisor/franchisee model, contractual ‎agreements requiring the employer to comply with its legal obligations or to meet certain ‎standards to protect the health or safety of its employees, and contractual agreements with the ‎employer requiring quality control standards. 

The DOL’s final rule attempts to provide a consistent and clear standard by which ‎employers can structure their arrangements with other employers.  However, it remains to be seen ‎how much deference the courts will accord it, and employers must keep in mind that other state ‎and federal laws may rely upon standards to determine joint-employer status different than those ‎promulgated by the DOL.  Both the National Labor Relations Board and the Equal Employment ‎Opportunity Commission are expected to adopt their own standards for determining joint-‎employer status under the respective laws they are tasked with enforcing.  Employers with ‎arrangements that may implicate joint-employer issues should consult counsel to determine how ‎to best structure those relationships to comply with various state and federal laws.  ‎

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_{1 Joint Employer Status Under the Fair Labor Standards Act, 85 Fed. Reg. 2820 (Jan. 16, 2020).
2 Department of Labor Press Release dated January 12, 2020 [last visited February 11, 2020].}