Labor Department Makes It Harder for Employees to Sue Joint Employers

By Ilona Demenina Anderson

The U.S. Department of Labor (DOL) administers the federal law that governs payment of overtime and minimum wage. Since employers have historically attempted to circumvent wage payment laws, the DOL has rules to administer the wage payment law. From time to time, it issues official interpretations of those rules to guide the conduct of employers.

Under the guise of making the rules easier to follow, the DOL recently issued a new interpretation of the “joint employer” rule. Rather than making the rule easier to follow, the new interpretation makes it more difficult for employees to sue for unpaid overtime wages when their duties are effectively managed by related employers.

What Is the FLSA?

The Fair Labor Standards Act (FLSA) is a federal law that governs wage payments. The FLSA requires most employers to pay extra compensation to “nonexempt” employees when they work more than 40 hours in a workweek. Nearly all hourly wage employees, and many salaried employees, are classified as nonexempt.

Nonexempt employees must be paid their hourly rate plus a premium rate equal to half their hourly rate for hours worked in excess of 40. That overtime rate is known as “time-and-a-half.” When nonexempt workers are paid by commission, the FLSA requires the employer to compute a “regular rate” of pay based on all earnings (including commissions) and to pay half the regular rate as an extra premium for overtime hours.

What Is Joint Employment?

Most employees have a single employer per job. They might work at two different jobs, but they will have a separate employer for each job.

In some cases, however, a worker with a single job might be shared by two related employers. For example, Tiny Toy Company might be a subsidiary of Big Toy Enterprises. Sally might take a job with Tiny Toy, but once a week she might be instructed to go next door to work at Big Toy. Is Sally an employee of Tiny Toy, Big Toy, or both?

The question is important because working for two related employers can create difficult wage payment issues. Suppose Sally works 36 hours at Tiny Toy and another 8 hours at Big Toy during her workweek. If she has only one employer, the FLSA requires the employer to pay Sally time-and-a-half for the 4 overtime hours she worked.

If Big Toy is truly a separate employer, Sally has worked 36 per week for her full-time employer and has worked another 8 hours in a part-time job. Since she has two jobs with two employers, she has not earned overtime.

To avoid paying overtime, Tiny Toy has an incentive to classify Sally as Big Toy’s employee when she works at Big Toy’s location, even if she does so at Tiny Toy’s direction. Whether that classification is lawful, or an unlawful way of gaming overtime laws, is addressed by the federal “joint employer” rule.

What Was the Former Joint Employer Rule?

The joint employer rule determines when two employers should be treated as a single employer for the purpose of paying wages required by the FLSA. Until the Department of Labor decided to change it, the joint employer rule was based on a practical understanding of how businesses save money at the expense of their employees. The DOL rules classified two employers as “joint employers” when it was fair to treat them as a single employer for the purpose of applying wage payment laws.

Under the basic rule, when “two or more employers are acting entirely independently of each other and are completely disassociated with respect to the employment of a particular employee,” they are separate employers. On the other hand, if two employers employ an employee jointly, then all work done for both employers during the workweek is considered a single employment, and the employers are jointly responsible for assuring compliance with the FLSA.

The DOL rule generally defined two companies as joint employers when:

  • The employers share the services of an employee;
  • One employer uses its employee to benefit the interests of the other employer; or
  • One employer directs and controls the services of an employee who serves a business that is not “completely disassociated” from that employer.

That rule is easy to apply to Sally’s employment. Tiny Toy and Big Toy are plainly her joint employers. The rule is more difficult to apply, however, when one business hires another business to provide employees who will serve its needs as technicians, delivery drivers, security personnel, or in other roles.

Was the Joint Employer Rule Confusing?

While the application of the rule might be obvious in many situations, whether an employee works for joint employers is sometimes unclear. The lack of clarity can be attributed in part to conflicting court decisions, some of which failed to implement the FLSA’s purpose of providing wage law protections broadly to the American workforce.

Court decisions have been particularly muddled in cases involving subcontractors, staffing agencies, third-party management companies, franchise agreements, and domestic employment. For example, one court decided that DIRECTV and DirectSat, a company that provided technicians to service DIRECTV customers, were not joint employers. That decision was reversed on appeal. DirectSat hired the technicians, but did so according to DIRECTV’s hiring criteria. DIRECTV also scheduled the work of the technicians, trained them, supplied their equipment, and provided quality control oversight of their work. While DIRECTV claimed that the technicians were employees of DirectSat, the appellate court determined that DIRECTV and DirectSat were joint employers, making them each responsible for FLSA violations.

Large employers are increasingly saving money by contracting out work to smaller firms. The large employers hope to wash their hands of FLSA violations that their contractors might commit.

Employers have an extra layer of protection when they can treat the business that actually benefits from their work as a joint employer. Large companies have more assets and are less likely to disappear or go out of business than the smaller firms that provide labor. Holding the large company accountable assures that workers receive the wage protections promised by the FLSA.

How Did DOL Respond to Conflicting Court Decisions?

If courts can’t agree on the application of the joint employer rule, should businesses be expected to understand it? The short answer is that smart employers hire lawyers who help them obey the law. The business community nevertheless complained to the DOL that the joint employer rule was too difficult to follow.

In response to complaints that the joint employer rule was confusing, DOL clarified the rule in 2016. A DOL Administrator’s Interpretation advised employers that “joint employment, like employment generally, ‘should be defined expansively’ under the FLSA.” That clarification advanced the purpose of the FLSA by assuring that most workers would earn overtime if they were made to work more than 40 hours in a workweek for related employers.

A year later, a change of administration brought a philosophy to DOL. The 2016 Administrator’s Interpretation was withdrawn without explanation. Having muddied the water by withdrawing the clarifying interpretation, the DOL again heard (and likely invited) complaints that the joint employer rule is confusing. It responded by adopting a new rule.

What Is the New Joint Employer Rule?

In the Trump administration’s continuing effort to favor the interests of businesses over the interests of their employees, DOL adopted an “easier” rule for employers to follow. The rule does make it easier for employers to avoid paying overtime, but it makes it harder for employees to receive the extra compensation they deserve when they work more than 40 hours a week for related employers.

The DOL’s announcement of the new rule touts its simplified, four-factor test. The test purportedly asks which 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 of pay; and
  • Maintains the employee’s employment records.

The test seems simple, but given the complexity of arrangements involving contractors, temp agencies, staffing companies, and franchises, simplicity is not a virtue. The purpose of the FLSA is to assure that workers receive overtime, not to make it easier for employers to shift responsibility for nonpayment of overtime to another company.

As the Economic Policy Institute explains, the new rule will enable employers to “evade responsibility under the FLSA by contracting out work.” The DIRECTV case discussed above is an example of a large corporation outsourcing work to a contractor that it effectively controls. While the contractor might claim that it determines the employee’s rate of pay, the contractor might do so within the limited range permitted by the company for which the work is performed. As the EPI notes, the new rule makes it more difficult “to hold accountable those large corporations that reserve contractual control and/or indirectly control the terms and conditions of employment.”

Wage theft — including the failure to pay overtime wages — is a growing problem. In the past, the DOL could be counted on to fight against wage theft. The new joint employment rule enables big companies and their contractors to point their corporate fingers at each other, leaving employees in the dark as to whether they are entitled to overtime and, if so, which employer should pay it. By helping big businesses avoid accountability for their contractors’ wage theft, DOL’s new joint employment rule shirks the agency’s responsibility to enforce the FLSA in a way that benefits workers, not businesses.

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