The Use of Third-Party Employees and Joint Employer Status Under Fair Labor Standards and Family Medical Leave Acts

To escape the economic and administrative burdens of the employer-employee relationship, employers increasingly turn to “shared employee” arrangements with Professional Employee Organizations (PEOs), staffing agencies, independent contractors and other third party vendors to supply temporary workers. In doing so, employers typically assume that the third-party provider is the “employer” of the temporary worker, and therefore the obligations arising under wage and hour, family/medical leave, discrimination and other employment laws will be borne solely by the third-party provider. Such assumptions may prove costly, as courts and administrative agencies often look past efforts to alienate the employer-employee relationship to find both businesses are the employer with joint responsibility for compliance with employment laws.

In two prior posts we discussed the respective tests adopted by the NLRB and the Third Circuit for determining when two or more entities can be deemed “joint employers” equally liable for violations of employment laws. You can read about the Third Circuit’s Darden Test here and the NLRB’s “joint employer” standard here. Now the United States Department of Labor (DOL) has issued new guidance on when a joint employer relationship – with attendant joint responsibilities – exists under the Fair Labor Standards Act (FLSA) and the Family and Medical Leave Act (FMLA). These recent pronouncements are the latest efforts by governmental agencies and the courts to grapple with the shared worker trend in the modern workplace.

On January 20, 2016 the DOL’s Wage and Hour Division issued Administrative Interpretation addressing joint employer status will be found under the FLSA. WHD Administrator David Weil described the consequences of joint employer status as follows:

When two or more employers jointly employ and employee, the employee’s hours worked for all of the joint employers during the workweek are aggregated and considered as one employment, including for purposes of calculating whether overtime is due.  Additionally, when joint employment exists, all of the joint employers are jointly and severally liable for compliance with the FLSA.

The guidance focuses on two situations – “horizontal joint employment” and “vertical joint employment” – that will fall within the broad scope of employment relationships subject to the protections of the FLSA.

Horizontal Joint Employment: The guidance instructs that “horizontal joint employment” will exist when an employee is employed by two (or more) separate but related or overlapping employers. In such a case, the employment for both entities is deemed one employment, all hours worked for both are added together, and each entity shares the joint responsibility for paying any overtime wages due. The DOL identified the following relevant factors for analyzing the degree of association between, and the sharing of control by, potential horizontal employers:

  • The existence of common ownership
  • The existence of overlapping officers, directors, executives or managers
  • Shared control over operations, such as hiring/firing, payroll, advertising and overhead costs
  • Intermingled operations, such as one administrative operation for both employers
  • Supervision by one potential joint employer over the work of the other
  • Shared supervisory authority over the employee by the potential joint employers
  • Treating employees of both entities as a pool of workers available to both
  • Shared clients and customers
  • The existence of agreements between the potential joint employers

By way of example, the guidance points to the situation where an employee is employed at two locations of the same restaurant brand operated by separate legal entities. However, the same individual owns both establishments and the managers of each restaurant share the employee between locations and jointly coordinate her scheduling. The two employers use the same payroll processor and share supervisory authority over the employee. According to the DOL, these factors suggest a joint employment between both employers.

Vertical Joint Employment: “Vertical joint employment” may exist where the employee has an employment relationship with one employer (a staffing agency, subcontractor or other labor provider) but the “economic realities” show that the employee is economically dependent on, and thus employed by, another entity involved in the work. In contrast to the horizontal joint employment analysis (where the focus is on the relationship between the employers), the focus here is on the employee’s relationship with the potential joint employer. The factors suggesting that a business is engaged in vertical joint employment of a third-party employee are:

  • Directing, controlling or supervising the work
  • Controlling employment conditions
  • The permanence and duration of the relationship
  • The repetitive or rote nature of the work
  • Whether the work is integral to the business
  • Whether the work is performed on the premises
  • Whether the business performs administrative functions for the employee, such as payroll, safety equipment and tools, transportation, workers’ compensation insurance

As an example of a vertical joint employer relationship, the guidance points to the situation where a laborer is hired and paid by ABC Drywall Company, an independent subcontractor on a construction project. The General Contractor (“GC”) provides all the training for the project, as well as the equipment, materials and workers’ compensation insurance, and is responsible for his health and safety on the site. The GC reserves the right to remove the laborer from the project, controls his schedule and provides assignments, but both the GC and ABC Drywall supervise his work. The laborer has been continuously working on the GC’s projects, whether through ABC Drywall or another intermediary employer. The DOL reasoned that these facts are indicative of a vertical joint employer relationship. However, consistent with its July 15, 2015 guidance on independent contractors, the DOL observed that the vertical joint analysis “must be an economic realities analysis and cannot focus only on control.”

On the same day it issued the Administrative Interpretation on joint employment status under the FLSA, the DOL issued guidance on the joint employer relationship and the corresponding responsibilities both employers assume under the FMLA. In determining the existence of the joint employer relationship, the DOL indicated that the “horizontal joint employment” and “vertical joint employment” factors applicable to joint employer determinations under the FLSA will likewise govern under the FMLA. In the event joint employment is established under the FMLA, in most cases one employer will be deemed the “primary employer” while the other will be deemed the “secondary employer.” The following factors should be considered in making that determination:

  • Which employer has the authority to hire and fire
  • Which employer decides how, when and the amount of wages
  • Which employer provides the employee’s leave and other benefits

Conferring “primary” or “secondary” employer status will fundamentally affect the respective companies’ obligations for ensuring FMLA compliance.

Responsibilities of the Primary Employer: The primary employer is responsible for providing required FMLA notices, providing FMLA leave, maintaining health benefits during the leave, returning the employee to the same or equivalent position, and compliance with all other FMLA obligations.  A primary employer must meet all of its obligations under the FMLA even when the secondary employer is not in compliance with the law or does not support the primary employer’s efforts in meeting these requirements.

Responsibility of the Secondary Employer: The secondary employer, regardless of whether or not it is an FMLA-covered employer with 50 or more employees, is prohibited from interfering with the jointly-employed employee’s exercise of FMLA rights.   In addition, in certain circumstances the secondary employer is responsible for restoring the employee to the same or equivalent job upon the return from FMLA leave, such as when the secondary employer is a client of a placement agency and continues to use the agency’s services when the employee is ready to return from the leave. Finally, the secondary employer must keep basic payroll and identifying data with respect to any jointly-employed employee.

Determining Employer Coverage and Employee Eligibility under the FMLA in Joint-Employer Circumstances: The DOL made it clear that employees who are jointly employed by two employers must be counted by both employers in determining whether the primary and secondary employers reach the 50 employees headcount triggering coverage under the FMLA.

Moreover, for the purposes of employee eligibility, in determining whether a jointly-employed employee works at a worksite where the employer employs 50 or more employees within a 75 mile radius (an eligibility requirement under the FMLA), the employee’s worksite is the primary employer’s office from which the employee is assigned or reports.   However, if the employee has continuously worked at the secondary employer’s worksite for at least a year, then the secondary employers’ worksite is the relevant location.

Businesses who utilize third party workers cannot ignore the trend in the DOL and elsewhere to hold the business jointly responsible for rights and obligations due to workers under federal and state laws.    Businesses can no longer assume that the intercession of a third party “employer” who hires and maintains the employee on its payroll insulates the business from liability for labor and employment law violations.  Businesses should closely scrutinize their relationships with both third party labor suppliers as well as the supplied worker to determine whether there are risk factors to suggest a joint employer relationship.

We at Lindabury are available at any time to answer any questions regarding the use and classification of temporary workers or any other employment questions that may arise during the normal course of your business.

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