On January 20, 2016, the U.S. Department of Labor’s Wage and Hour Division (“WHD”) issued guidance for businesses where two or more separate entities each have relationships with the same workers. The guidance addresses when businesses will be considered to be joint employers and, therefore, may be jointly liable for violations of the Fair Labor Standards Act (“FLSA”) which governs employer pay practices. The guidance also impacts the calculation of overtime because time worked for separate entities may be added together in order to determine the amount of hours an employee works each week, thus giving rise to potential overtime claims.

The guidance was issued in the form of an Administrator’s Interpretation (“AI”) of the law. While it does not have the force and effect of the law, it does reflect the WHD’s position on the issue. Moreover, courts often rely on the WHD’s interpretation when making rulings.

The WHD guidance addresses what it calls “horizontal” and “vertical” joint employment scenarios. WHD states that joint employment may exist when two or more employers each separately employ an employee and are sufficiently related to each other with respect to that employee. The WHD calls this type of joint employment horizontal joint employment. In this scenario, an employee may perform separate work for each employer. The focus is on the relationship between or among the two or more employers.

The second type of joint employment is what WHD refers to as a vertical joint employment. This occurs when an employee of one employer is also economically dependent on another employer. This type of joint employment typically occurs when a company has contracted for workers that are directly employed by another business. This type of relationship might be one between a contractor and general contractor or a staffing agency and the business for which it provides employees.

Defining a Horizontal Joint Employer Relationship

In determining whether there is a horizontal joint employer relationship, the guidance sets forth facts that may be relevant when analyzing the degree of the association between, and sharing of control by, potential joint employers. These factors are:

  • Who owns the potential joint employers (i.e., does one employer own part or all of the other or do they have common owners);
  • Do the potential joint employers have any overlapping officers, directors, executives, or managers;
  • Do the potential joint employers share control over operations (e.g., hiring, firing, payroll, advertising, overhead costs);
  • Are the potential joint employers’ operations intermingled (for example, is there one administrative operation for both employers, or does the same person schedule and pay the employees regardless of which employer they work for);
  • Does one potential joint employer supervise the work of the other;
  • Do the potential joint employers share supervisory authority for the employee;
  • Do the potential joint employers treat the employees as a pool of employees available to both of them;
  • Do the potential joint employers share clients or customers; and
  • Are there any agreements between the potential joint employers.

The guidance provides the following as an example of what it considers to be horizontal joint employment:

An employee is employed at two locations of the same restaurant brand. The two locations are operated by separate legal entities (Employer A and Employer B). The same individual is the majority owner of both Employer A and Employer B. The managers of each restaurant share the employee between the locations and jointly coordinate the scheduling of the employee’s hours. The two employers use the same payroll processor to pay the employee, and they share supervisory authority over the employee. WHD concludes that these facts are indicative of a horizontal joint relationship between Employers A and B.

Defining a Vertical Joint Employer Relationship

The focus in vertical joint employment cases is whether one employer is economically dependent on the other employer. The guidance suggests that when conducting a vertical joint employment analysis, WHD will rely on the economic realities test, which includes an analysis of multiple factors including the following:

  • Who directs, controls or supervises the work performed;
  • Who controls the employment conditions;
  • Whether there is a permanent or long-term relationship;
  • Whether the work is repetitive and rote (rote, repetitive and unskilled work indicates economic dependence);
  • Whether the employee’s work is an integral part of the potential joint employer’s business;
  • Whether the work is performed on the premises of the potential joint employer; and
  • Whether the potential joint employer performs administrative functions such as payroll and workers’ compensation insurance, providing necessary facilities and safety equipment, tools and materials.

WHD provides the following example of what it contends is a vertical joint employer relationship:

A laborer is employed by Company A, which is an independent subcontractor to Company B. Company A was engaged to provide drywall for the project. Company A hires and pays the laborer. Company B provides the training on the project, the necessary equipment and materials, workers’ compensation insurance, and is responsible for the health and safety of the worker. Company B also reserves the right to remove the worker from the project and both companies supervise the worker. WHD contends that these facts are indicative of a vertical joint employment relationship.

In addition to providing the guidance by way of the AI, WHD issued QandAs, diagrams, and new fact sheets [ Administrator’s Interpretation; Joint Employment AI Questions and Answers; Graphical Illustration of “Vertical” Joint Employment; Graphical Illustration of “Horizontal” Joint Employment; Fact Sheet-Joint Employment Under the FLSA and MSPA; Fact Sheet: Joint Employment and Primary and Secondary Employer Responsibilities Under the FMLA.] All of these items are available at the DOL website.

Employers Need to Carefully Consider Their Relationships or Face Consequences

The bottom line – businesses that are related in any manner need to take note of this important guidance. WHD has made very clear that joint employer relationships under the FLSA should be defined broadly. While the guidance issued by WHD does not have the force of law, courts often rely on WHD’s interpretation of the law when making decisions. Equally important is the signal that WHD intends to aggressively examine joint employment relationships when conducting investigations. A mistake in this area, intentional or not, may give rise to substantial economic and other consequences. There may be liability for joint employers for overtime, liquidated damages, penalties, attorneys’ fees, and even possible criminal charges.