Look Up and Down and All Around—Department of Labor Guidance Emphasizes "Vertical" and "Horizontal" Joint Employment for Wage-and-Hour Liability

The United States Department of Labor's Wage & Hour Division ("WHD") recently released an Administrative Interpretation (the "AI") regarding standards for determining joint employment under the Fair Labor Standards Act ("FLSA").

This means that some entities that don't consider themselves an individual's employer could be considered an employer for purposes of wage-and-hour laws. If that happens, an entity may be liable for violations of minimum-wage or overtime requirements even though it currently doesn't think it is employing individuals making the claim. Although WHD indicated that it sees violations "in all industries," WHD intends to focus on the construction, agricultural, janitorial, warehouse and logistics, staffing, and hospitality industries.

WHD Sets Out Two Tests That Broaden Scope of Who Is Considered an Employer

WHD indicated that the purpose of the AI is to have the "broadest possible" interpretation of the statutory term "employ," which in turn means a broad interpretation of joint employment. With the AI, WHD seeks to achieve greater statutory coverage and increase recovery. If WHD determines that two entities are in either "vertical" or "horizontal" joint employment with respect to an employee, the larger entity with deeper pockets can be held liable for the violations of the smaller entity.

Frequently employers think of joint employment in terms of their relationship with an individual who might be an employee. But WHD will look for horizontal joint employment by focusing on the relationship between the companies that could be employers. In other words, WHD is basing joint employment on the ties between companies in addition to the more common relationship between an individual and company. WHD provided two examples of horizontal joint employers: (1) two separate restaurants that share economic ties and have the same managers controlling both restaurants, and (2) home health care providers that share staff and have common management.

When analyzing joint-employer issues, WHD will consider:

1. Who owns the potential joint employers (whether one company owns part or all of the other or whether they have any common owners).
2. Whether the potential joint employers have any overlapping officers, directors, executives, or managers. 
3. Whether the potential joint employers share control over operations, including hiring, firing, payroll, advertising, and/or overhead costs. 
4. Whether the potential joint employers' operations are intermingled. 
5. Whether one potential joint employer supervises the work of the other. 
6. Whether the potential joint employers share supervisory authority for the employee. 
7. Whether the potential joint employers treat the employees as a pool of workers available to both of them. 
8. Whether the potential joint employers share clients or customers. 
9. Whether there are any agreements between the potential joint employers.

But WHD isn't abandoning the relationship between an individual and a company to assess joint employment. Vertical joint employment exists when the employee has an employment relationship with one employer, such as a staffing agency or a subcontractor, and the "economic realities" show that the employee is "economically dependent on, and thus employed by, another entity involved in the work." The analysis, then, centers on the relationship of the potential joint employers with the employee. WHD provided two examples of vertical joint employment: (1) a construction worker employed by a subcontractor could also be an employee of the general contractor, and (2) a farmworker employed by a farm labor contractor could also be an employee of the grower.

WHD will consider the following factors in evaluating whether joint employment exists "vertically":

1. Whether and to what extent the work performed by the potential employee is controlled or supervised (directly or indirectly) by the potential joint employer beyond a reasonable degree of contract performance oversight.
2. Whether the potential joint employer controls the employment conditions, including whether the potential joint employer has the authority to hire or fire the employee, modify employment conditions, or determine the rate or method of pay.
3. The degree of permanency and duration of the relationship, taking into consideration the industry in which the relationship exists.
4. The extent to which the potential employee's work for the potential joint employer is repetitive and rote, is relatively unskilled, and/or requires little or no training.
5. Whether the work performed by the potential employee is an integral part of the potential employer's business.
6. Whether the work is performed on the potential joint employer's premises. (It is immaterial whether the potential joint employer leases as opposed to owns the premises where the work is performed, so long as the potential employer controls the premises.)
7. Whether and to what extent the potential joint employer performs administrative functions for the employee, such as handling payroll, providing workers' compensation insurance, providing necessary facilities and safety equipment, housing, or transportation, or providing tools and materials required for the work.

In general, if the worker spends most or all of his or her time at a potential joint employer's location for an indefinite duration, receives most or all of his or her directions from the potential joint employer, and is not contributing highly specialized skills, WHD will probably find a joint employment relationship.

WHD's interpretation is consistent with recent decisions by courts in Oregon and Washington regarding their states' respective wage and hour laws. In both states, the economic realities test determines whether a potential employer is a joint employer, and thus liable for wage violations of the other employer. And in fact, Oregon and Washington authorize greater monetary liability than the FLSA because of longer statutes of limitations, higher state minimum wage (and even higher municipal wages in certain cities like Seattle), and additional damages that may be available under state law that may not be available under federal law. While WHD's interpretation applies only to the federal law, it may signal to state regulators that momentum is building for more expansive enforcement of wage-and-hour laws locally.

What Should an Entity Concerned About This Issue Do?

WHD's focus on joint employment should give any entity pause, but especially those in the construction, agricultural, janitorial, warehouse and logistics, staffing, and hospitality industries. If an entity has any concern, it should:

• Assess its relationships with other entities that rely heavily on labor to undertake critical work for the company, considering the horizontal factors and whether the relationship seems to implicate them.
• Assess its relationships with individuals that the entity considers "indirect" sources of labor that benefit the company.
• If concerns suggesting that the relationships above could trigger joint employment arise, address the risks by better defining relationships with the other entity—contracts with other entities should specify which entity will be responsible for wage and hour compliance.
• Ensure that any providers of labor are being properly paid, even if not considered direct employees, by obtaining representations from the other potential joint employer confirming who is paying for labor.

Wage and hour law exposure includes penalties and attorney fees for successful challenges that go far beyond the wages owed, and often arise in the form of class and collective actions. And wage and hour laws are already fraught with trip wires. The AI demonstrates that risk can lurk below the surface of apparently safe staffing arrangements. Employers need to look up and down and all around when evaluating potential exposure to claims for overtime and minimum wage.