Third Circuit Clarifies "Joint Employer" Test Under FLSA

by McNees Wallace & Nurick LLC

This post was contributed by Adam R. Long, a Member in McNees Wallace and Nurick LLC's Labor and Employment Group.

As in most types of class-based litigation, plaintiffs in Fair Labor Standards Act (FLSA) collective actions typically seek certification of as broad a class as possible. As the number of potential class members grows, so does the size of the employer's potential liability and the plaintiffs' leverage to obtain a large and lucrative settlement. One way to broaden the class size is to include employees of the employer's sister companies in the class, under the theory that the sister companies' parent company qualifies as the plaintiffs' "joint employer."

In the context of an FLSA collective action, the Third Circuit recently considered and established the test to be used to determine whether a parent company qualifies as the "joint employer" of its subsidiaries' employees under the FLSA. In In re Enterprise Rent-a-Car Wage & Hour Employment Practices Litigation (pdf), plaintiff Nickolas Hickton, a former assistant branch manager employed by Enterprise-Rent-a-Car Company of Pittsburgh ("Enterprise Pittsburgh"), pursued a nationwide FLSA collective action claiming that he and other Enterprise assistant branch managers were misclassified as exempt and owed overtime wages under the FLSA. In support of his claim for a nationwide class, Hickton alleged that Enterprise Pittsburgh's parent company, Enterprise Holdings, Inc. ("Enterprise Holdings"), was his and the other class members' "joint employer." Enterprise Holdings is the sole shareholder of Enterprise Pittsburgh and 37 other domestic subsidiaries that rent and sell vehicles and conduct other business under the "Enterprise" brand name.

Enterprise Holdings does not rent or sell vehicles, but rather provides optional administrative services and support to its subsidiaries, including business guidelines, employee benefit plans, and insurance, technology, and legal services. Enterprise Holdings' human resources department also provides job descriptions, best practice guidelines, training materials, a standard performance review form, and compensation guidelines to the 38 subsidiary companies. Each individual subsidiary can choose whether and to what extent it wishes to use any of these services. Each subsidiary has the same three board members, all of whom also served on Enterprise Holdings' board. At a 2005 meeting attended by representatives of both Enterprise Holdings and its subsidiaries, Enterprise Holdings "recommended" that its subsidiaries not pay overtime wages to their assistant branch managers employed outside of California.

Enterprise Holdings moved for summary judgment, claiming that it was not a joint employer of the alleged class members and, thus, not liable for the FLSA overtime claims. The District Court granted the motion, and the Third Circuit affirmed the dismissal of the claims against Enterprise Holdings on appeal. After noting that it had not previously considered the standard for determining "joint employment" status under the FLSA, the Third Circuit reviewed the relevant statutory and regulatory language and decisions of other courts and confirmed that

"where two or more employers exert significant control over the same employees—[whether] from the evidence it can be shown that they share or co-determine those matters governing essential terms and conditions of employment—they constitute 'joint employers'" under the FLSA.

(emphasis added). The Third Circuit then set forth a non-exhaustive list of factors relevant to determine FLSA joint employer status:

When faced with a question requiring examination of a potential joint employment relationship under the FLSA, we conclude that courts should consider: 1) the alleged employer's authority to hire and fire the relevant employees; 2) the alleged employer's authority to promulgate work rules and assignments and to set the employees' conditions of employment: compensation, benefits, and work schedules, including the rate and method of payment; 3) the alleged employer's involvement in day-to-day employee supervision, including employee discipline; and 4) the alleged employer's actual control of employee records, such as payroll, insurance, or taxes. As we have noted, however, this list is not exhaustive, and cannot be "blindly applied" as the sole considerations necessary to determine joint employment. If a court concludes that other indicia of "significant control" are present to suggest that a given employer was a joint employer of an employee, that determination may be persuasive, when incorporated with the individual factors we have set forth.

Using its new test, the Third Circuit found that Enterprise Holdings met none of the four factors and was not, therefore, the plaintiffs' joint employer.

Pennsylvania employers with parent/subsidiary corporate relationships should be cognizant of the Enterprise decision and its potential ramifications. Specifically, if a parent company wishes to reduce the risk of a finding that it is the joint employer under the FLSA of its subsidiaries' employees, it should make optional any administrative services it provides to its subsidiaries and avoid exercising significant control over the subsidiaries' day-to-day employment-related operations. If the parent entity exercises significant control over its subsidiaries' operations, it increases the risk that it (and its other subsidiaries) may be roped into an expansive FLSA collective action.


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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