On January 12, 2020, the U.S. Department of Labor (USDOL) issued a final rule narrowing the definition of “joint employer” under the Fair Labor Standards Act (FLSA) and providing clarity to businesses about franchise and contractor relationships.
In its first significant update to the joint-employer rule in more than sixty (60) years, the USDOL created a four-factor balancing test to determine whether businesses share liability for federal FLSA wage and hour violations. The department will consider whether a business:
- Hires and fires employees;
- Supervises and controls employees’ work schedules or conditions of employment to a substantial degree;
- Determines employees’ rate and method of payment; and
- Maintains employment records.
Reserving the right to control the employee’s working conditions would not be enough to show that a business is a joint employer; the company would have to actually exert that control. So, businesses likely won’t be deemed joint employers if they stay out of the day-to-day employment decisions of their contractors and franchisees.
The final rule will take effect March 16, 2020.
In addition to the four-factor balancing test, the final rule clarifies that an employee’s “economic dependence” on a company doesn’t determine whether that company is a joint employer under the FLSA. The USDOL also provided several examples of how to apply the new rule in various scenarios.
Many organizations operate with complex supply chains where all the members of the chain are asked to, for example, conduct harassment training, ensure no human trafficking is taking place and generally to be in compliance with the law. Those standards are permitted under the rule as long as actual control is not exercised in hiring and firing, compensation and other employment factors.
The rule clarifies that the following factors don’t influence the joint-employer analysis:
- Having a franchisor business model.
- Providing a sample employee handbook to a franchisee.
- Allowing an employer to operate a facility on the company’s grounds.
- Jointly participating with an employer in an apprenticeship program.
- Offering an association health or retirement plan to an employer or participating in a plan with the employer.
- Requiring a business partner to establish minimum wages and workplace-safety, sexual-harassment-prevention and other policies.
Tips for Businesses
Companies should review their employment policies and practices to help determine potential risks, to see how relationships with third parties operate in reality (and not just on paper), and to review contractual language with vendors to ensure that the highest degree of protection is obtained. They should also engage legal counsel to determine if they are joint employers of certain individuals with other entities.
Employers should note that the rule applies only to wage and hour issues under the FLSA. It does not apply to other federal statutes, or state laws.
Finally, the National Labor Relations Board and the Equal Employment Opportunity Commission are expected to issue rules about joint-employer status under the National Labor Relations Act and anti-discrimination laws, respectively.