On April 1, the US Department of Labor proposed a new rule seeking to narrow the application of joint employer status under the Fair Labor Standards Act (FLSA). A finding of joint employer status can impose joint and several liability on a business along with the hiring employer for the employee’s wages. By narrowing the test, the proposal brings potential good news to franchise businesses in particular.

The proposal outlines a “four-factor balancing test” for the Department to apply collectively in its assessment of whether a business is a joint employer with another.

The Proposed Four-Factor Test

The test considers whether the potential joint employer actually exercises the power to:

  1. Hire or fire the employee;
  2. Supervise and control the employee’s work schedule or conditions of employment;
  3. Determine the employee’s rate and method of payment; and
  4. Maintain the employee’s employment records.

Notably, if this rule is adopted, it could potentially result in fewer businesses being found to be a joint employer by a court or agency when it comes to matters such as minimum wage and overtime. However, challenges to such an outcome include the fact that this rule may simply be considered an interpretive rule which is not legally binding as Congress did not directly give the Department the authority to define joint employment.

The Department’s Hypotheticals Are Unclear

Although the Department aims to provide clarity with this proposed new rule, the hypothetical examples provided are anything but clear.

For example, the Department states in one hypothetical that an office park company that pays a janitorial service a fixed fee to clean the space after hours would not be found to be a joint employer of the janitors, even if the office park company reserves the right to supervise those workers. However, the Department also states that a country club that uses contract landscapers would be liable as a joint employer of those workers if the country club sporadically assigns the workers tasks throughout each workweek, gives them “periodic instructions during each workday,” and keeps intermittent records of their work.

In a third example, the Department states that a hotel franchisor that gives franchisees sample job applications, employee handbooks, and other documents would not be a joint employer of the franchisee’s workers if it uses an “industry-standard” licensing agreement that makes the franchisee solely responsible for hiring and firing, setting pay rates, and supervising the work.

Employer Takeaways

This proposed rule is open for public comment for 60 days. We will revisit this proposed new rule as it develops, and note if it becomes final, as it may usher in a new era for employers’ wage and hour responsibilities.

Note that even if the DOL’s standard for establishing joint employer liability loosens, how the agency interprets and applies the new rule may be quite context-dependent as seen in the examples provided. Accordingly, undertaking a joint employer risk audit with counsel is an indispensable tool for evaluating potential risk arising from relationships with third-party suppliers of workers, including both employment law and labor relations aspects. The reality is that employers who engage in otherwise legitimate “contracting out” or “contracting in” with a third-party supplier may unwittingly step into the shoes of the employer for the subject workers despite the fact that the workers were retained by the supplier.

For more detailed analysis and solutions around joint employer issues, please reach out to your Baker McKenzie employment lawyer.