DOL Officially Rescinds Joint Employer Rule, Expanding Pay Protection for Workers

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On July 29, 2021, the U.S. Department of Labor issued a final rule rescinding the joint employer rule issued under the prior administration. With the rescission of the rule, the DOL returns to its prior approach, making findings of joint employer status – with the concurrent obligations for employers under the Fair Labor Standards Act – more likely.

Under the FLSA, several entities may be the joint employers of a single employee as long as they are “not completely disassociated” with respect to the employment of the employee. These joint employers are then jointly and severally liable for the employee’s wages.

In 2016, the DOL under the Obama administration issued an Administrator’s Interpretation (AI) in which it adopted an expansive “economic realities” test to assess joint employer status. (Although the AI is no longer on the DOL website, you can view it here). This test heavily favored the finding of such status. The Trump DOL, however, withdrew the AI in June 2017, and issued a new Final Rule in January 2020, as we discussed in our January 13, 2020 E-lert. This rule made findings of joint employer status to be less likely, including in franchise situations. The rule was challenged in court, and on September 8, 2020, a federal judge vacated a significant portion of the rule, as we covered in our September 10, 2020 E-lert. Following the change in administration, the Biden DOL then proposed to rescind the rule, as discussed in our March 2021 E-Update.

In rescinding the joint employer rule, the DOL states that it was concerned that the rule was contrary to the FLSA and Congressional intent, and inconsistent with prior DOL guidance. Moreover, the rule did not encompass all possible joint employer relationships. The DOL also rejected the rule’s strict right-of-control test in favor of its prior “totality-of-the-circumstances economic realities standard that has generally been used by the courts.” It also expressed concern about the negative impact on workers who would not be able to collect unpaid wages from a joint employer.

With the rescission of the rule, employers can expect the DOL to adopt the approach that was set forth in the prior AI, although that has not formally been reissued as of yet. In that AI, the DOL noted that the concept of joint employment under the FLSA and Migrant and Seasonal Agricultural Worker Protection Act is “notably broader” than under the common law.

Like the now-rescinded rule, the AI discussed two types of joint employment relationships: horizontal and vertical. But the AI’s analysis encompassed other factors and favored findings of joint employment, as follows:

Horizontal Joint Employment: Horizontal joint employment exists where an employee has two (or more) technically separate but related or associated employers – the focus here is on the relationship between the two employers, covering situations where:

  • The employers have an arrangement to share the employee’s services;
  • One employer acts in the interest of the other in relation to the employee; or
  • The employers share control of the employee, directly or indirectly, because one employer controls, is controlled by, or is under common control with the other employer.

An example of this type of horizontal joint employment relationship is where the same owner owns separately incorporated restaurants, and the managers of the two restaurants share employees and coordinate scheduling together.

The AI set forth a non-exhaustive list of factors to be considered in evaluating the relationship between employers in horizontal joint employment cases:

  • Who owns or operates the possible joint employers?
  • Do the employers have any overlapping officers, directors, executives, or managers?
  • Do the employers share control over operations?
  • Are the operations of the employers intermingled?
  • Does one employer supervise the work of the other?
  • Do the employers share supervisory authority over the employee?
  • Do the employers treat the employees as a pool of workers available to both of them?
  • Do they share clients or customers?
  • Are there any agreements between the employers?

According to the AI, not all, or even most, of these factors must be present for joint employment to be found.

Vertical Joint Employment: Vertical joint employment exists where one employer (the intermediary employer) provides workers to another employer (the potential joint employer), and the workers are “economically dependent” on both employers. The focus of the analysis here is on the relationship between the worker and the potential joint employer. This type of relationship is typically raised with regard to staffing agencies, temporary agencies, independent contractors, third-party management companies, and labor providers.

With regard to vertical joint employment, the AI stated that the first inquiry is whether the intermediary employer is an employee of the potential joint employer.  If so, then its employees are also deemed employees of the potential joint employer.  If not, then the analysis turns to an evaluation of the employee’s economic dependence on the potential joint employer.  The AI set forth a non-exhaustive list of factors to be considered in that regard:

  • Does the potential joint employer direct, control, or supervise (even indirectly) the work?
  • Does the potential joint employer have the power (even indirectly) to hire or fire the employee, change employment conditions, or determine the rate and method of pay?
  • How permanent or lengthy is the relationship between the employee and the potential joint employer?
  • Does the employee perform repetitive work or work requiring little skill?
  • Is the employee’s work integral to the potential joint employer’s business?
  • Is the work performed on the potential joint employer’s premises?
  • Does the potential joint employer perform functions for the employee typically performed by employers, such as handling payroll or providing tools, equipment, or workers’ compensation insurance, or, in agriculture, providing housing or transportation?

Again, not all of the factors must be present for a finding of joint employment.

We would expect the DOL to reissue a version of this AI or provide other similar guidance at some point in the near future. Until that time, this information may be helpful as a general guide of how the DOL might address joint employer issues.