Who’s The Boss?  How the New Federal Joint Employment Rule Impacts Employers

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Traditional employer/employee relationships aren’t as prevalent today as a decade ago. Laws haven’t caught up with these new workplace arrangements forcing lawmakers to consider new ways to ensure that the rights of workers are protected. Are you liable under the new Joint Employment Rule?

More than 80 years ago, President Franklin D. Roosevelt signed the Fair Labor Standards Act, or FLSA, into law. The landmark legislation transformed workplace conditions in the United States, banning child labor, setting a minimum wage, and regulating overtime pay.

But employer-worker arrangements in today’s workplaces aren’t as clear cut as they were in the 1930s. The traditional relationship of an employer hiring an employee to work exclusively for them 40 hours a week isn’t as prevalent today as it was even a decade ago.

In 2020, the gig economy is booming. Workers are making a living as independent contractors or on-demand workers. And in cases of joint employment, they may answer to two or more employers — the business(es) they spend their days at and the staffing agency, third-party vendor, or other entity who hired and maybe even manages them.

Laws such as the FLSA haven’t caught up with these new workplace arrangements. And that’s forcing lawmakers and regulators to consider new ways to ensure that the rights of workers and employees are protected.

The latest effort comes from the U.S. Department of Labor, which issued the Final Rule on Joint Employer Status, the first substantive update to FLSA’s joint employer rule in more than 60 years, in January. The rule will have significant implications for some employers and workers when it goes into effect on March 16.

Who’s Responsible?

The FLSA requires employers to pay their employees at least the federal minimum wage and overtime for every hour worked over 40 hours in a week. But, in the cases of joint employment, where a worker may answer to two entities, who is responsible for meeting FLSA’s standards?

Consider a cleaner who works for both a building management company and a staffing agency. Who is responsible for ensuring the cleaner doesn’t work too many hours and is paid at least minimum wage — the building management company, which guides the worker’s duties and work hours, or the staffing agency, which oversees the worker’s employment?

How about fast food restaurant workers? Is the franchisee of a fast food restaurant responsible for satisfying FLSA requirements — or is it the franchisor, which establishes exactly how the burgers are made and the restaurants are maintained, as well?

The Final Rule on Joint Employer Status answers those questions by outlining two workplace scenarios.

Employment Scenario No. 1

In the first scenario, a worker has one employer who signs them on to work, but also another individual or entity — a potential joint employer — who simultaneously benefits from that work.

To determine if they are directly or indirectly controlling the employee and must comply with the FLSA, potential joint employers must ask themselves the following questions, derived from Bonnette v. California Health and Welfare Agency:

  1. Did they hire and can they fire the worker?
  2. Do they supervise and control the employee’s work schedule or conditions of employment to a substantial degree?
  3. Do they decide the employee’s rate and method of pay?
  4. Do they maintain the employee’s employment records?

No answer to a single question in this four-factor test will determine employment status. And other information that proves that the potential joint employer is exercising significant control over the terms and conditions of the employee’s work can be considered. It’s important to note that in a joint employment situation, both employers must exercise one or more of the factors.

The new rule also describes a handful of situations that aren’t relevant when determining joint employment status. A potential joint employer’s contractual agreements with the primary employer to require compliance with specific health, safety, and quality control standards aren’t applicable. Neither is a potential joint employer’s practice of providing the employer with a sample employee handbook or collaborating with them in an apprenticeship program or association health or retirement plan.

And, most importantly for franchises, the new rule singles out franchisors, saying they are absolved of employer liability if they can pass that four-factor test.

Employment Scenario No. 2 

In the rule’s second scenario, an employee works for one employer for a set number of hours each week and another employer for another set of hours in the same week. In this case, if the employers are acting independently from each other, there is no joint employment relationship under FLSA.

But there are cases in this scenario where joint employment could be occurring. For example, if two companies work together to hire a security guard to patrol their neighboring office buildings at night, according to the labor department, they aren’t each required to pay the guard the minimum rate for the work, but each would still be considered joint employers under FLSA.

Win for Franchisors, Staffing Agencies

The new rule is a win for some employers, pulling back former guidance that more broadly defined these joint employment relationships.

Before it was approved, there was the potential that franchisors could be drawn into FLSA claims. Now, if the franchisor is meeting the prongs of the four-step test and is generally removed from the direct oversight of workers, they are not considered a joint employer under the new rule.

Similarly, staffing companies that place the worker at another employer are not liable for FLSA claims if they have no direct or indirect oversight per the four-factor test.

Companies that directly engage staffing agencies or third-party hiring vendors, however, will want to look closely at their relationships. Now, when facing FLSA claims, they can no longer declare joint liability except under limited circumstances when they source employees through third parties. They’ll need to remain aware of the staffing agency’s control of workers under the rule’s four-factor test, along with the direction they also provide the individual and be ready to comply with FLSA’s wage and overtime requirements accordingly.

But it doesn’t mean these companies must be entirely hands-off with these workers — or at least the ways they are sourced and staffed. Section 791.2(d)(3) of the labor department’s commentary suggests that typical vetting or placement activities, like requesting background checks or supplying related disclosure or authorization forms on behalf of a third-party engagement doesn’t make joint-employer status more likely.

In other words, organizations that engage external agencies to find workers may be able to contractually require those vendors to use a specific background checking program set what check is required and monitor and enforce the use of that program. And, as long as those organizations don’t view the completed background checks or make decisions about individuals based on them, they likely have protection against claims of joint-employer status.

The labor department’s new joint employment rule is just another example of regulators and lawmakers’ attempts to address today’s disjointed workplaces. Much in the same way, California’s Assembly Bill 5, which went into effect January 1, and other proposed state and federal laws like it, seek to address worker misclassification and the growing number of independent contractors. As the workplace continues to transform, companies need to stay tuned for more efforts like these that guide our working lives — and set new compliance requirements for employers. More laws and regulations are likely on the horizon.

Alonzo Martinez

Alonzo Martinez

Alonzo Martinez is Associate General Counsel at HireRight. Mr. Martinez is responsible for monitoring and advising on key legislative and regulatory developments globally affecting HireRight’s service delivery. His work is focused on ensuring HireRight’s performance as a consumer reporting agency and data processor complies with relevant legal, regulatory, and data furnisher requirements. Mr. Martinez obtained his Juris Doctorate from the University of Colorado, and is licensed by the Supreme Court of the State of Colorado. He is a member of the Colorado Bar Association Employment Law Division, the Association of Corporate Counsel, and the Professional Background Screening Association.

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