Business Counselor February 15, 2016

U.S. Department of Labor to More Aggressively Use “Joint Employer” Status to Impose Greater Overtime Liability Upon Employers

Although we are now in a new year, some things still remain the same. The U.S. Department of Labor (“DOL”), which last July announced an increased focus in identifying whether independent contractors are actually employees protected by the Fair Labor Standards Act (“FLSA”), continues to aggressively enforce wage and hour laws against employers. On January 20, 2016, the Wage and Hour Division of the DOL issued Administrator Interpretation No. 2016-1 which states that the DOL will increase its enforcement efforts into whether an employer is a “joint employer” under the FLSA. The Interpretation states that the DOL will now apply the FLSA’s definition of “employ” as broadly as possible. The end result is that the DOL will likely find more liability for those entities whose workers are employed, or supplied by third-parties and are typically referred to by the contracting parties as “contractors.”

A joint employer relationship may occur when two or more entities share employees or use third-party management companies, independent contractors, staffing agencies, or labor providers to perform work. The DOL classifies joint employers into two categories. “Horizontal” joint employment occurs when an employee is employed by two or more technically separate but related or overlapping employers. For example, two legally distinct businesses that are owned by the same individual and coordinate scheduling of the same workers at different worksites are likely to be found a joint employer

“Vertical” joint employment typically occurs when an employer has contracted or arranged with another employer to provide it with labor and/or perform employer job functions, such as hiring and payroll. For example, the DOL will likely find this type of joint employment exists where a staffing agency, subcontractor, labor provider, or “other intermediary employer,” supplies employees to a user employer.

The primary significance of a joint employer finding is that when two or more employers jointly employ a worker, all of the worker’s hours during the workweek are counted for purposes of considering whether any overtime compensation is owed. Therefore, employers who are splitting hours of workers among two or more entities, or are not counting hours of “contractors” they direct and control during the workday, may be subject to potential overtime liability as a “joint employer.” The FLSA permits an employee (which, as a practical matter, typically involves a class of employees claiming they were improperly classified as “contractors”) to recover unpaid overtime wages for up to three years if there is a willful violation along with liquidated damages equal to the amount of the back pay, plus attorney’s fees and court costs. The DOL may also impose fines upon an employer for violating the FLSA. As a result, there is a significant amount of potential liability under the FLSA if an employee is misclassified as a “contractor.”

In the event of FLSA liability, the DOL asserts that each joint employer can be held “individually” responsible for the entire amount of wages due and for payment of any other assessed damages. Further, one employer’s bankruptcy or inability to pay the awarded back pay or damages does not relieve the other employer of its obligation to pay the full amount of unpaid wages to an employee. DOL investigators will now (more than ever) attempt to uncover evidence of joint employment status during an investigation or audit in order to impose liability on the maximum number of employers and obtain a greater amount of damages on behalf of employees.

Although many entities attempt to contract around an employment relationship by hiring a “contractor” through a third-party vendor, it is important to note that agreements with other entities, which may address risks via contractual protections such as release, indemnity and hold harmless provisions, may not fully protect your entity. In order to minimize potential exposure to a joint employer finding, we recommend that you take the following action now before a potential DOL audit, or investigation occurs:

  • Have your current and future workforce structures carefully reviewed. An analysis of how much a user entity’s supervisors exercise direct or indirect control over the supplier entity’s employee is critically important. That is because the degree of shared control over workers among entities (i.e., ability to hire, fire, schedule, compensate) is a factor used by the DOL when assessing the existence of a joint employer relationship.
  • Carefully review and, if necessary, renegotiate the terms of any employment service, staffing or sharing agreements covering your workforce to ensure that the agreement does not provide the user firm with the ability to share, control, or codetermine the essential terms and conditions of the supplier entity’s employees. Each of these factors are used by the DOL to establish a joint employer relationship.