New labor rule issued on joint employment liability

January 26, 2020

Lawsuits arising from violations of the Fair Labor Standards Act can be some of the most costly to employers.

Liability can only occur if a business fails to comply with the requirements of the FLSA — namely to pay overtime for all hours worked over 40 in a workweek — for its employees.

Sometimes the question of liability rests on who is the employer and whether an individual can have multiple liable employers.

The U.S. Department of Labor recently implemented a final rule clarifying when an employee has multiple employers and thus could hold multiple organizations liable for FLSA violations.

For example, assume Company Z contracts with ABC IT Services to retain contractors to perform IT services for a period of time. Also assume that ABC IT Services fails to properly calculate overtime, and/or the contractors underreport their time worked resulting in underpayment. Not only is ABC IT Services liable under the FLSA, but the Labor Department has now clarified under what scenario Company Z is jointly liable for damages.

According to the department, liability for joint employment is determined when the “employee has an employer who suffers, permits, or otherwise employs the employee to work, but another individual or entity simultaneously benefits from that work.”

The final rule sets forth a four-factor test in making that determination. Those factors include whether the employer:

  • hires or fires the employee;
  • supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
  • determines the employee’s rate and method of payment; and
  • maintains the employee’s employment records.

The Labor Department notes that not one test makes the determination and that the analysis must balance multiple factors and be viewed in its entirety.

However, if, after conducting this analysis, both ABC and Company Z are considered employers, they are jointly and severally liable for the employee’s wages.

The Labor Department identified a second scenario that it stated was not affected by the final rule.

Under that scenario, Fred Smith works for a retail company for 25 hours a week and a hospital 30 hours a week. As previous guidance stated, if the employers are entirely independent of each other and dissociated in all respects, there is no joint employment relationship for purpose of counting hours worked or liability.

The department cautioned, however, “if the employers are sufficiently associated with respect to the employment of the employee, they are joint employers and must aggregate the hours worked for each for purposes of determining if they are in compliance.”

The agency considers them “sufficiently associated” if “there is an arrangement between them to share the employee’s services, the employer is acting directly or indirectly in the interest of the other employer in relation to the employee, or they share control of the employee, directly or indirectly, by reason of the fact that one employer controls, is controlled by, or is under common control with the other employer.”

While today’s employers are getting creative to establish many non-traditional work arrangements, the law does not permit any avoidance of liability under the FLSA where an organization is determined to be an employer.

Employers cannot contractually agree otherwise or make promises contrary to the law. The employment relationship is established by actual fact, not contract.

For more information: https://www.dol.gov/agencies/whd/flsa/2020-joint-employment.