Relaxed Rules for Joint Employers: Proceed with Caution

Being classified as a "joint employer" means that you, and the other business considered to be in the joint relationship with you, are equally responsible for complying with the Fair Labor Standards Act (FLSA). If the other entity fails to comply with FLSA requirements, you could be left holding the bag.

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Suppose, for example, you own and operate a commercial property management business. You subcontract janitorial services to an outfit we'll call Acme Janitors Inc. If you're classified as a joint employer with Acme and it turns out that Acme has been paying employees below minimum wage, or not paying overtime when they should have, you could be looking at trouble.  

The problem with the current regulations, according to the U.S. Department of Labor (DOL), is that they're confusing and partly inconsistent with the underlying law. "The Department hasn't meaningfully revised its joint employer regulation since 1958," the DOL stated in announcing its proposal. Since 1958, several contradictory federal court rulings have been issued on joint employer status, leaving a legally confusing environment for many employers.

"Completely Disassociated" Test

At the heart of the matter is a provision in the current regulations that suggests that unless one company is "completely disassociated" with another, it can take on joint employer status. But the current regulations don't explain how that standard applies to situations in which one company uses its employees to perform services for another company that's paying it to provide those manpower services.

Also, the DOL states that the current rules may "create uncertainty over what business practices result in liability as a joint employer, potentially impacting the willingness of organizations to engage in any number of business practices vis-a-vis another entity."

Perhaps the biggest change in the proposed regulations involves the "completely disassociated" standard. In situations where employees work for one company that simultaneously benefits another, the "not completely disassociated" standard no longer needs to be met to avoid joint employer status. Instead, four factors are to be taken into account to determine whether a "potential joint employer" is truly a joint employer for Family Medical Leave Act compliance purposes. Specifically, does the potential joint employer:

  1. Hire and fire employees,
  2. Supervise and control the employees' work schedules or conditions of employment,
  3. Set the employees' rate and method of pay, and
  4. Maintain the employees' employment records?

Weighing All Factors

No single factor is used to ascertain the status, but all factors are weighed to determine the degree to which the potential joint employer exercises "significant control over the terms and conditions of the employee's work."

The proposed regulations state that there isn't any particular business model, such as a franchise system, that's assumed to be indicative of joint employer status. The same applies to "certain business practices" described in the proposed regulations. Those practices include:

  • Providing a sample employee handbook to a franchisee,
  • Allowing an employer to operate a facility on one's own premises, or
  • Jointly participating with an employer in an apprenticeship program.

In other words, simply doing those things doesn't serve as evidence that you're a joint employer.

Similarly, you as the "potential joint employer" and the other entity can enter into certain agreements without increasing the probability of being declared a joint employer. Examples offered in the proposed regulations: "Requiring an employer to institute workplace safety measures, wage floors, or sexual harassment policies." It all comes down to a subjective weighing of the four-part test.

To further clarify their meaning, the new proposed regulations included several illustrations of when an arrangement would confer joint employer status, and when it wouldn't.

What's Your Status?

Here's an example of when a joint employer relationship wouldn't exist:

An office park company ("A") hires a janitorial services company ("B") to clean the building after hours. Under the agreement, "A" pays a fixed fee to "B" for the services and reserves the right to supervise the janitorial employees. But "A" doesn't set pay rates for "B's" employees and doesn't exercise its option to supervise those employees.

And here's an example that goes the other way:

A packaging company ("A") requests workers on a daily basis from a staffing company ("B"). "A" determines each worker's hourly pay, supervises their work, and adjusts the number of "B's" employees it will need and the number of hours they'll work each day, sending them home if work demands diminish during a shift. "A" does have joint employer status "because it exercises sufficient control over their terms and conditions of employment by setting their rate of pay, supervising their work, and controlling their work schedules," according to the DOL. Note that several but not all of the criteria in the four-part test were met.

But even if you're deemed to have joint employer status, that only matters if the other joint employer falls short of its obligations under the FLSA. That means you just need to be confident that they are FLSA compliant.

Also, keep in mind that states can set their own standards in this area. Be sure you know your own state's requirements in addition to the federal ones when you engage in a relationship that could place you in joint employer status.

Don't Expect Quick Action

It could take several months or longer for the regulations to be enacted. The DOL needs to digest comments it has received on the proposed version, and possibly beat back litigation from labor groups that believe the regulations are too lax.

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