Under the federal Fair Labor Standards Act (FLSA), covered employers must pay their employees at least the federal minimum wage for every hour worked and overtime for every hour worked over 40 in a work week. The Department of Labor (DOL) has long recognized that an employee can have two or more employers—called joint employers—who are both liable for that employee’s wages.
Many contractors tend to overlook their potential liability as a joint employer. However, as the construction industry continues to face labor shortages and many turn to staffing agencies and alternative employment arrangements, overlooking potential joint employer status can prove devastating. Contractors must consider the potential liability of being deemed a joint employer with its staffing agencies and subcontractors.
When does an employer qualify as a joint employer?
A company may qualify as a joint employer under two scenarios. First, a joint employer relationship may exist where two companies benefit from the work of an employee. Second, a joint employer relationship may exist where one company employs a worker for a set number of hours, and a second company employs the same worker for an additional number of hours in the same work week.
The latter scenario generally applies in circumstances where the employers are sufficiently associated with respect to the employment of the employee. This typically applies when there is an arrangement between the employers to share the employee’s services; when the employer is acting directly or indirectly in the interest of the other employer in relation to the employee; or when the employers share control of the employee, directly or indirectly, by reason of the fact that one employer controls, is controlled by, or is under common control with the other employer.
The first scenario above—an arrangement where two employers benefit from the employee’s work—is more likely to impact those in the construction industry. A contractor may benefit from the work of another company’s employee and be deemed a joint employer from its use of subcontractors or staffing agencies. On March 16, 2020, a new DOL rule went into effect that narrows the definition of a joint employer in instances where a second employer benefits from another employee’s work. This new test replaces the myriad of tests and standards that were being applied in different states and courts, and it provides greater uniformity in how and when an employer could have liability under the FLSA. Under the new rule, a second benefiting employer will be deemed a joint employer if that employer:
- hires or fires the employee;
- supervises and controls the employee’s work schedule or conditions of employment;
- determines the employee’s rate and method of payment; and/or
- maintains the employee’s employment records.
These four factors represent a balancing test. In other words, the determination of joint employer status depends on the particular facts of each case. Each of the factors may be given different weight depending on the situation, and not all factors must necessarily be present to qualify as a joint employer. Simply maintaining employment records, however, does not confer joint employer status.
Courts also have discretion to consider a wide number of factors that relate to supervision and control—for example, the provision of tools or equipment or control over the means and methods of work. However, the existence of contractual agreements or requirements to comply with legal standards, such as those relating to health and safety, does not make joint employer status more likely. Similarly, an employer must actually exercise control, directly or indirectly, to hire or fire, supervise or control, determine payment and/or maintain records—simply having the ability to do so does not make an employer a joint employer. Indirect control requires that the joint employer issue mandatory directions to the employer that directly controls the employee. Simply making requests, recommendations or suggestions that the intermediary employer has discretion to accept or reject will not suffice.
What precautions should a contractor take?
Contractors should ensure that they analyze their business model and review their service agreements and subcontracts. Thoroughly reviewing contract provisions that articulate who controls aspects of the employee and the employee’s work, as well as indemnification and other liability-shifting provisions, may help employers avoid liability or mitigate their potential exposure.
Though determining joint employer status now involves a more streamlined, uniform analysis, analyzing these factors will not always be an easy task. Consult skilled legal counsel for guidance as to how to apply the balancing test to your particular situation.
