U.S. Labor Department Finalizes Rule Limiting Joint Employer Liability

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In April 2019, the U.S. Department of Labor’s Wage and Hour Division published proposed rules dealing with the definition of joint employment under the Fair Labor Standards Act. Joint employment status means that two or more employers are both liable for wage and related legal violations affecting employees. Traditional joint employment scenarios include a temporary employment agency that assigns workers to a client’s location. Both companies are jointly and severally liable for failure to pay the workers’ wages.

In recent years, DOL expanded this definition to include other business relationships, particularly franchises. In earlier administrative determinations, DOL found the franchisor to be legally liable for the franchisee’s wage violations if it concluded that the franchisor had the authority to exert control over work practices, or if the employees were economically dependent on the franchisor.

On January 12, DOL issued final regulations that represent a significant retreat from this earlier position. Under the rules, companies will only be considered joint employers when they meet a four-factor test:

  1. Does the other company hire or fire the worker?
  2. Does it control the worker’s schedule and conditions of work to a significant degree?
  3. Does it determine the worker’s rate and method of payment?
  4. Does it maintain the worker’s employment records?

DOL then gives a series of examples of when a particular business arrangement meets this four-part test. While the traditional temp agency structure remains joint employment, typical franchise agreements fall outside of this classification. For example, the franchisor requiring certain work practices or providing the franchisee with employment forms and policies will not meet this test absent evidence of exercise of actual control of the workers by the franchisor. DOL makes clear that economic dependence is not a factor in this analysis.

These regulations should give franchisors and some other contractors for services assurances that they will not be held liable for wage violations for workers over whom they do not exercise control. However, employers should exercise caution until courts consider the new rule, as noted in this accompanying article. Absent a successful legal challenge, the new rules take effect March 16, 2020.

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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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