Department of Labor Issues Guidance on Joint Employment Under the FLSA

Another federal agency has weighed in on the joint employer issue—this time it is the Department of Labor (DOL). On January 20, 2016, the DOL Wage and Hour Division Administrator David Weil released an Administrator’s Interpretation (AI) setting forth the DOL’s position as it relates to joint employment under the Fair Labor Standards Act (FLSA) and the Migrant and Seasonal Agricultural Worker Protection Act. The joint employment concept is not new and the DOL claims that it conducts hundreds of investigations that may involve this issue each year. The AI does not explicitly target franchising relationships, instead focusing on work relationships involving staffing agencies, third-party management companies and labor providers. Nevertheless, it is important for franchisors to continue to review their relationships with franchisees' employees in light of this latest foray.

The Fair Labor Standards Act

The FLSA establishes minimum wage, overtime pay, recordkeeping, and youth employment standards for private and public employees. Again, the concept of joint employment is not new under the FLSA, and the AI reiterates that where joint employment exists, all of the joint employers are jointly and severally liable for compliance with the FLSA. Notably, the DOL boasts that the FLSA test for joint employment is very broad, much broader than the common-law test which looks to the level of control over the worker. Furthermore, the DOL clarifies that the FLSA joint employment test is independent from tests under other labor statutes, such as those administered by the National Labor Relations Board (NLRB) or the Occupational Safety and Health Administration (OSHA) that have been making headlines.

Under the FLSA, an individual is an employee of an entity that “suffers or permits” the individual to perform work. This somewhat awkward language was originally intended to regulate businesses that used middlemen to illegally hire and supervise children—the rationale being that the business is responsible for FLSA compliance where it: is indirectly responsible for the work; has the opportunity to detect work being performed illegally; and has the ability to prevent the violation from occurring. The DOL intends to apply this in the modern era stating that a potentially larger or more sophisticated joint employer may have a “greater ability to implement policy or systematic changes to ensure compliance.”

Remember, if joint employment status is found each of the joint employers are jointly and severally liable for FLSA compliance and for any unpaid wages and penalties, regardless of any contract between them.

Horizontal and Vertical Joint Employment Relationships

The AI differentiates between two types of joint employment relationships: “horizontal” joint employment and “vertical” joint employment. Horizontal joint employment is where an individual has employment relationships with two or more employers, and where those employers are sufficiently associated or related such that they jointly employ the individual. In the franchise industry, this can arise where the same employees work at multiple locations for the same franchisee. This is common practice for multiunit franchisees that leverage the skills of managers or assistants at their multiple locations.

Vertical joint employment exists where the individual has an employment relationship with one employer—for example, a staffing agency or subcontractor (which the AI refers to as the “intermediary employer”)—and the economic realities show that he or she is economically dependent on, and thus “jointly” employed by, another entity (which the AI refers to as the “joint employer”). Vertical joint employment is similar to that which the NLRB is seeking in the McDonald’s and Browning Ferris matters. In the franchise industry, vertical joint employment would mean the franchisor is the joint employer of the franchisee’s employees, as the NLRB alleges in the McDonald's case. However, the concept can also apply in the multiunit franchisee context if the franchisee uses a parent management or shared services company with subsidiaries running the outlets.

Factors Relating to Horizontal Joint Employment

The DOL will look to the following factors in determining whether a horizontal joint employment exists:

• Who owns the potential joint employers;
• Whether the potential joint employers have overlapping officers, directors, executives, or managers;
• Whether the potential joint employers share control over operations (e.g. hiring, firing, payroll, advertising, overhead costs);
• Whether the potential joint employers’ operations are intermingled (e.g., whether the same person schedule and pay the employees regardless of which employer they work for);
• Whether the potential joint employers share supervisory authority for the employees; and
• Whether the potential joint employers treat the employees as a pool of employees available to both of them.

Joint employment will not exist if the two entities are acting entirely independent of each other and are completely disassociated. Thus, separate franchisees who operate independently are not horizontal joint employers. However, a multiple unit franchisee who commingles human resources, payroll, and other operational control and administration over the multiple sites is likely to be found a joint employer to the extent the franchisee utilizes the same labor force at multiple locations. For example, the waitress who works for two restaurants that are operated by the same franchisee is likely a joint employee of both restaurants, assuming there is overlapping operation and administrative control, even if the units are operated by two separate legal entities. As a result, her hours worked at both facilities will be aggregated for purposes of calculating whether overtime pay is due.

Factors Relating to Vertical Joint Employment

The DOL will look to the following factors in determining whether a vertical joint employment exists:

• The extent to which the work performed by the employee is controlled or supervised by the potential joint employer beyond a reasonable degree of contract performance oversight. Under this factor, control can be indirect and the DOL’s examples include the potential joint employer having the power to hire or fire the employees, modify employment conditions, or determine the rate of or method of pay.
• The permanency and duration of the relationship. While this factor appears to be directed at staffing agencies, it is concerning for franchisors because their relationships with franchisees are intended to be long term.
• The repetitive or rote nature of the work. The AI says that unskilled labor which requires little or no training weighs in favor of joint employment because the employee is economically dependent on the potential joint employer. If challenged, franchisors would argue that most franchisee employees, even if relatively unskilled, are required to perform training in terms of how to perform their duties.
• Whether the employee’s work is an integral part of the potential joint employer’s business. The DOL says this factor has long been the hallmark of determining whether an employment relationship exists as a matter of economic reality. This factor bodes poorly for the franchise industry because its business model depends on the work performed by the franchisees' employees.
• The degree to which the employee’s work is performed on premises owned or controlled by the potential joint employer. This factor weighs in favor of most franchisors because they typically do not own or control the premises on which franchisees establish their businesses; however, there are many exceptions.
• The degree to which the potential joint employer performs administrative functions commonly performed by employers. This factor reinforces the need for franchisors to stay out of the day-to-day operations of the franchisee’s business. A franchisor’s involvement in activities like payroll, providing worker’s compensation insurance, providing necessary facilities and equipment, etc. will cause the franchisor to be more likely to be found a joint employer than one who allows its franchisees to operate their business.

Significance for Franchisors

Notably, the DOL asserts that the AI is intended for a wide range of industries and is not focused on franchise relationships. The DOL states:

The form of business organization, such as franchise, does not necessarily indicate whether joint employment is present. Indeed, the existence of a franchise relationship in and of itself, does not create joint employment.

Based on our investigative experience, there are many workers, including those who work for a franchised business, who have multiple jobs with multiple employers who are not joint employers. Ultimately, of course, whether a particular franchisee and franchisor jointly employee a worker is based on the facts of each situation and must be made on a case-by-case basis applying the analyses discussed in the AI.

Joint employment exposes a company to expansive liability for unpaid wages, overtime pay, and penalties for workers who are not on their payroll. Wage and hour class actions have been and continue to be on the rise, and it would not be surprising if plaintiffs’ lawyers rely on this AI to name both the franchisee and franchisor as defendants in these types of lawsuits.

This new guidance is consistent with the aggressive joint employer positions taken by the NLRB and other branches of the DOL, including OSHA. Ultimately, a determination of joint employment will be made solely on the specific factual situation. The DOL’s goal is to push the boundaries of joint employment and to hold companies that benefit from work performed by another entity’s employees equally responsible for employment and labor law violations. While the overall goal of protecting abused employees and ensuring labor laws are not circumvented by indirect employment arrangements may certainly be laudable, the standards and analysis utilized are more likely to ensnare innocent businesses.

For questions, please contact Christopher L. Nickels at (414) 277-5519/christopher.nickels@quarles.com, David A. Beyer at (813) 387-0264/david.beyer@quarles.com, David B. Kern at (414) 277-5653/david.kern@quarles.com, or your Quarles & Brady attorney.