In January 2020, the U.S. Department of Labor (DOL) released its Final Rule on the often-litigated joint employer issue under the Fair Labor Standards Act (FLSA), which took effect on March 16, 2020. Prior to the publication of the Final Rule, the Fair Labor Standards Act’s (“FLSA”) joint-employer standard had not been substantively changed in over 60 years.

Under the FLSA, an “employer” is “any person acting directly or indirectly in the interest of an employer in relation to an employee;” a joint employer is any additional “person” (i.e., an individual or entity) who is jointly and severally liable with the employer for the employee’s wages. Consistent with the FLSA’s broad definitions and scope of coverage, the DOL’s regulations specifically recognize that two or more employers may jointly employ one employee, and generally require employers to comply with their legal responsibilities under the FLSA.

Where an employee performs work for the employer that simultaneously benefits another individual or entity, the Final Rule adopts a four-factor balancing test to determine whether the potential joint employer is directly or indirectly controlling the employee.

Four-Factor Balancing Test

The DOL’s Final Rule lays out a four-factor balancing test, derived from the Ninth Circuit test articulated in Bonnette v. California Health & Welfare Agency (9th Cir. 1983), to evaluate employer-like behavior. The four-factor balancing test assesses whether the potential joint employer:

1.  Hires or fires the employee;

2.  Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;

3.  Determines the employee’s rate and method of payment; and

4.  Maintains the employee’s employment records. “Employment records” are the types of records that evidence the potential employer’s activities in the other three factors, such as maintaining payroll records.

According to the DOL, additional factors may also be relevant in determining whether another person is a joint employer, “but only if they indicate whether the potential joint employer is exercising significant control over the terms and conditions of the employee’s work.” Whether a person is a joint employer will depend on all the facts in the case, and the appropriate weight to give each factor will vary depending on the circumstances but no single factor is determinative of joint employer status.

The Final Rule further clarifies that to be a joint employer under the FLSA, a second employer must actually exercise—directly or indirectly—one or more of the four control factors. The reserved right to exercise this control may in some instances be relevant for determining joint-employer status, but such a reserved right, if not actually utilized, will not, without other factors, establish a joint-employer relationship.

Factors Not Relevant

The Final Rule contains other important points and identifies factors that are not relevant to the determination of FLSA joint employer status. For example, the Final Rule specifies that whether the employee is economically dependent on the potential joint employer, including factors used to establish whether a particular worker is a bona fide independent contractor, are not relevant to determine joint employer liability. Other factors that do not make joint employer status more or less likely under the Act, include:

•   the potential joint employer’s contractual agreements with the employer requiring the employer to comply with its legal obligations;

•   the potential joint employer’s contractual agreements with the employer including those requiring the potential joint employer to:

–   satisfy certain health and safety standards or requirements;

–   provide training; or

–   implement quality control standards to ensure the consistent quality of the work product, brand, or business reputation;

•   the potential joint employer’s practice of providing the employer with a sample employee handbook, or other forms, or allowing the employer to operate a business on its premises (including “store within a store” arrangements);

•   The employee’s “economic dependence” on the potential joint employer. Factors that assess economic dependence include the employee’s:

–   role in in a specialty job;

–   opportunity for profit or loss based the employee’s managerial skill;

–   investment in equipment or materials; and

–   number of other contractual relationships for similar services.

Joint Employer Rules in California

Although DOL issued its new Final Rule, California has its own set of joint-employer rules that are generally more protective of workers than the federal law. The Industrial Welfare Commission and the California Supreme Court have adopted a joint-employer definition emphasizing the employer’s control over wages, hours and working conditions, and the extent to which the potential joint employer knew of and failed to prevent wage and hour violations.

The California Supreme Court set out the factors that can create a joint employer relationship in Martinez v. Combs (2010). Under the Martinez test, to “employ” means (1) “to exercise control over…wages, hours or working conditions,” (2) “to suffer or permit to work,” or (3) “to engage, thereby creating a common law employment relationship.” The court in Ochoa v. McDonald’s Corp. (N.D. Cal. 2015) explained that “[a]ny of the three is sufficient to create an employment relationship.”

Although a potential joint employer’s control is often pivotal in determining joint-employer liability, in some circumstances California statutes impose joint-employer liability regardless of who exercises control. For example, California Labor Code section 2810.3 holds companies strictly liable for wage and hour violations when they use staffing agencies, or other labor contractors, to supply workers.

Federal Lawsuit to Challenge DOL Final Rule

Although the DOL limits the four-factor test to “actions taken with respect to the employee’s terms and conditions of employment, rather than the theoretical ability” to take such actions, a coalition of state attorney generals filed a complaint for declaratory and injunctive relief in the Southern District of New York challenging the validity of the Final Rule. The complaint alleges that the Final Rule unlawfully narrows the joint employment standard under the FLSA, undermines critical workplace protections for the country’s low-income and middle-income workers, and leads to increased wage theft and other labor law violations.

Until this lawsuit makes its way through the courts, or an injunction is issued, employers should consult with counsel to assess potential risks, and review whether they may be jointly and severally liable for employees’ wages in light of the Final Rule.

Jennifer A. Mancera is an attorney with Noland, Hamerly, Etienne & Hoss. She represents companies in a variety of employment law matters and has extensive human resources management experience.