Fourth Circuit Decision Establishes New Six-Factor Test for Determining Joint Employment under the FLSA

by Littler

On January 25, 2017, the U.S. Court of Appeals for the Fourth Circuit established a new six-factor test to determine whether two or more entities are joint employers for purposes of the Fair Labor Standards Act (“FLSA”).  Salinas v. Commercial Interiors Inc., No. 15-1915, ___ F.3d ___, 2017 WL 360542 (4th Cir. Jan. 25. 2017).  The resulting standard is unique from other circuits and appears to expand joint employer liability under the FLSA.

The Fourth Circuit applies a “two-step framework for analyzing FLSA joint employment claims, under which courts must first determine whether two entities should be treated as joint employers and then analyze whether the worker constitutes an employee or independent contractor of the combined entity.”  Salinas, 2017 WL 360542, at *9.  However, unlike other circuit courts, before Salinas the Fourth Circuit refrained from identifying “specific factors” to guide that analysis.  Id.  In Salinas, the Fourth Circuit clarified the proper test to apply and provided several factors for courts should consider when applying it.  Id. at *10. 

The named plaintiffs, Mario Salinas and William Ascencio, installed drywall for J.I. General Contractors, a subcontractor to Defendant Commercial Interiors.  They brought an action against J.I. and Commercial alleging violations of the FLSA, Maryland Wage and Hour Law and Maryland Wage Payment and Collection Law.  Before the Fourth Circuit, the parties only briefed the issue of joint employment under the FLSA.  Id. at *2 n.3.  However, the Fourth Circuit’s resolution of the joint employment issues under the FLSA resolved analogous questions under the Maryland Wage and Hour Law, which defines “employer” consistently with the FLSA.  Id.

The plaintiffs argued that J.I and Commercial Interiors jointly employed them and, on this basis, the hours worked for both employers each week should have been aggregated to assess compliance with the FLSA and Maryland law.  The district court granted Commercial’s motion for summary judgment, applying a “novel” five-factor analysis that focused on the “legitimacy of the contracting relationship” between the general and subcontractor and whether the entities “intended to evade federal and state wage and hour laws.”  Id. at *3.  

In reversing the district court, the Fourth Circuit clarified that the legitimacy of the business relationship between the two entities is not dispositive of joint employment status. The Court of Appeals rejected various iterations of the factors set forth by the Ninth Circuit in Bonnette v. California Health and Welfare Agency and other circuits’ “economic realities” tests.  Instead the Fourth Circuit announced its own new test, which finds joint employment status where: “(1) two or more persons or entities share, agree to allocate responsibility for, or otherwise codetermine – formally or informally, directly or indirectly – the essential terms and conditions of a worker's employment and (2) the two entities' combined influence over the essential terms and conditions of the worker's employment render the worker an employee as opposed to an in-dependent contractor.”   Id. at *18.  The Court of Appeals also set forth six non-exclusive factors that district courts “should” consider when applying the test:

(1) Whether, formally or as a matter of practice, the putative joint employers jointly determine, share, or allocate the power to direct, control, or supervise the worker, whether by direct or indirect means;

(2) Whether, formally or as a matter of practice, the putative joint employers jointly determine, share, or allocate the power to—directly or indirectly—hire or fire the worker or modify the terms or conditions of the worker's employment;

(3) The degree of permanency and duration of the relationship between the putative joint employers;

(4) Whether, through shared management or a direct or indirect ownership interest, one putative joint employer controls, is controlled by, or is under common control with the other putative joint employer;

(5) Whether the work is performed on a premises owned or controlled by one or more of the putative joint employers, independently or in connection with one another; and

(6) Whether, formally or as a matter of practice, the putative joint employers jointly determine, share, or allocate responsibility over functions ordinarily carried out by an employer, such as handling payroll; providing workers' compensation insurance; paying payroll taxes; or providing the facilities, equipment, tools, or materials necessary to complete the work.

Id. at **10-11. 

In applying the new test, the Salinas court rejected Commercial Interiors’ argument that its relationship with J.I. was “nothing more or less than the contractor-subcontractor relationship which is normal and standard in the construction industry.”  Id. at *15.  The court stated that whether Commercial Interiors and J.I. “engaged in a ‘traditional,’ ‘normal,’ or ‘standard’ business relationship has no bearing on whether they jointly employ a worker for purposes of the FLSA.”  Id.  Instead, the Fourth Circuit concluded that the defendants jointly employed Plaintiffs for purposes of the FLSA and remanded the case for further proceedings.  Id. at *18.

The Fourth Circuit’s new test comes with familiar disclaimers: no one factor is dispositive, the list is not exhaustive, and any “facts” relevant to the “fundamental” question must be considered.  The Fourth Circuit’s comprehensive approach is consistent with the more recent trend of broadly interpreting joint employment liability by the Department of Labor Wage and Hour Administrator under the FLSA.

Recommendations for Employers

The Fourth Circuit’s new standard all but rejects the “economic realities” and similar tests in favor of a test that is more consistent with the DOL regulations and less favorable for employers. In light of this decision, it will be important for employers to identify potential vulnerabilities in their business relationships with subcontractors, staffing agencies, professional employer organizations, independent contractors, and other entities or individuals with whom they share workers.  In addition to evaluating their own practices, employers should monitor the practices of those with whom they share workers, especially in the wage and hour area, to help defend against a finding of joint employer liability under this new standard.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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