What You Need to Know About Joint Employment: a DOL Interpretation Review
On January 20, 2016 the Department of Labor (DOL) issued Administrator’s Interpretation No. 2016 -1 on the subject of Joint Employment under the Fair Labor Standards Act (FLSA) and Migrant and Seasonal Agricultural Worker Protection Act (MSPA). If you a) have never heard of the concept of joint employment and/or b) have no idea if or how it impacts your organization rest assured you are not alone.
The regulations on joint employment have existed for a long time; however, the DOL is cracking down on organizations who have separated themselves from the employment relationship (via subcontracting work, franchising their business, etc.) to receive the profit generated by the extended employees without the risk associated with complying with DOL regulations on employment. To do this, they’ve expanded the interpretation of joint employment making a lot of businesses wide eyed to the notion.
What is Joint Employment?
The overarching theme of the DOL’s Interpretation is that two separate employers may be jointly responsible for an employee as it relates to Fair Labor Standards Act (FLSA) and Migrant and Seasonal Agricultural Worker Protection Act (MSPA). One employee may work for two organizations who are jointly responsible for adhering to the Department of Labor laws set forth in the management and treatment of employees.
For instance, John Smith is a contractor working for a local telecommunications company who in turn hires employees to do the work for the telecommunications company. In this example, the employees of the contractor may also be considered employees of the telecommunications company. Sounds confusing, doesn’t it?
This does not mean that every scenario where an employee works for two organizations leads to joint employment responsibilities between those two organizations; in fact, the Interpretation clearly states this is not the case. The DOL provides clarification of two types of joint employment that may exist within an organization: horizontal joint employment and vertical joint employment.
Horizontal Joint Employment
Horizontal joint employment focuses on the relationship between the two employers in question. If there is joint ownership, management, or sufficient association between the two employers the joint employment likely exists. Sufficient association is described as a scenario where one employer controls, is controlled by, or is under common control with another employer.
A common example here is two individual restaurants that are owned by the same parent employer and an individual works at both locations. These restaurants are expected to jointly ensure the employee is paid according to the Wage and Hour Laws of the DOL. The interpretation dives into facts for assessment to help aide you in identifying horizontal joint employment relationships.
Vertical Joint Employment
The definition of vertical joint employment is the focus of a lot of the buzz on this topic and its origin is the NLRB’s expanded standard of joint employment. Previously, direct or indirect control of an individual and their work pointed to joint employment under NLRB; they have now included the right to control in their standards even if the right is never exercised. This means, if a contract indicates an employer has the right to dictate the work environment (uniform, schedule, how the work is done, who does the work, etc.) they have joint employment responsibilities even if they don’t execute that right and all of the decisions are actually made by the subcontracting firm.
Vertical joint employment exists where a potential entity appears to separate the direct relationship between the potential joint employer and the employee in question. The DOL’s Interpretation dovetails on the NLRB standard and emphasizes the liability on the lead business/employer for secondary employees they are responsible for via their subcontracts, staffing agencies, franchises and so forth. We see these kind of relationships often in staffing firms, the construction industry, government contracting, etc.
7 Factors to Consider with Vertical Joint Employment
There are seven economic reality factors laid out in the Interpretation for businesses to consider when exploring vertical joint employment:
- Control and supervision of the work being done beyond a reasonable degree of contract performance oversight
- Control of the employment conditions to include decisions to hire, fire, determine rate of pay, etc.
- Permanency and duration of the relationship
- Repetitive and rote nature of the work
- Employee’s work being integral to the business
- Work performed on the work sites controlled or owned by the potential joint employer
- Performing administrative tasks
A common example of vertical joint employment is when a hotel engages with a staffing agency to hire all of the housekeeping and janitorial staff. The hotel dictates the schedule requirements, the uniform, the rate of pay, and requires they be part of the interview process before a new team member can come on board. Once on board, a housekeeper may support the hotel for years and the hotel conducts random quality checks of the work performed by the housekeeper. Although the hotel likely just pays a monthly invoice to the staffing agency who then cuts the paycheck to the individual workers, the hotel is by definition a joint employer of the workers and is jointly responsible for ensuring those workers are paid in accordance with FLSA.
What does joint employment mean for your organization?
Joint employment means that both individual organizations are jointly responsible for adhering to FLSA and MSPA regulations and each individual employer is independently and wholly liable for any damages and/or penalties incurred by not adhering to these regulations. The Interpretation goes on to provide examples of how this shows up in a real-life scenarios. If joint employment exists, the two employers must have processes in place to ensure they are complying jointly with FLSA and MSPA.
For example, let’s say that a non-exempt employee has two jobs and has been working 30 hours at each establishment per week. The employee has not been receiving any overtime from either employer because they have never independently exceeded the 40 hour threshold that requires them to pay time and a half. Although the independent employers may not have been aware, they are joint employers of the employee because each separate entity whom employs the individual is a subsidiary of a larger parent company. The courts could indicate that horizontal joint employment exists due to the relationship of the two subsidiaries and may find each employer independently and wholly liable for back pay owed to the employee and fines associated with non-compliance.
How do I protect my organization from liability associated with joint employment?
After hearing a number of employment attorneys speak on the topic of joint employment, the three following recommendations have consistently shown up in those discussions:
- Consult with an employment law attorney to ensure you have a solid understanding if joint employment exists in your organization.
- Seek legal review of your contracts which should spell out expectations of your partners to comply with any and all federal and state employment law regulations. Indemnity clauses that protect you from any lawsuits associated with your subcontractor or franchisee, for example, who does not comply with the law are strongly encouraged although are not a 100% guarantee of release of responsibility. For government contracting agencies this is similar to existing federal regulations in which a prime contractor is responsible for ensuring subcontracting teams are complying with federal law including Fair Pay and Safe Workplaces Act, FAR regulations, Service Contract Act and OFCCP regulations.
- Do your due diligence on who you will engage with as a partner for your business. Choose reputable employers and trustworthy partners to help protect yourself from potential risk.
If you’re still feeling uneasy about the liabilities to your organization consider working with a strategic HR partner to assess your organization’s policies and processes as they relate to federal compliance. Your HR partner can also help to establish policies and processes that require employees to notify you of employment outside of your organization in order to identify potential joint employment concerns.
If you haven’t had an opportunity to read the DOL Interpretation, I encourage you to spend a few moments to do so. The Interpretations issued by the DOL provide clear and helpful explanations, along with examples and scenarios to support those explanations, in an effort to help organizations and leaders have a stronger understanding of the regulations imposed by the DOL.