The issue of joint-employer status has long concerned contingent workforce managers engaging temporary employees through a staffing agency. On Jan. 12, the Department of Labor announced its final rule revising and updating its regulations interpreting joint employer status under the Fair Labor Standards Act, or FLSA. This rule not only draws boundaries of joint employment for employers but makes findings of joint employment more difficult as well.

The final rule provides updated guidance for determining joint-employer status when an employee performs work for his or her employer that simultaneously benefits another individual or entity, including guidance on the identification of certain factors that are not relevant when determining joint-employer status.

The DOL’s aim in publishing the final rule, which goes into effect March 16, is to promote certainty for employers and employees, reduce litigation, promote greater uniformity among court decisions, and encourage innovation in the economy.

Joint Employment Under the FLSA

The FLSA requires covered employers to pay their employees at least the federal minimum wage for every hour worked and overtime for every hour worked over 40 in a workweek. To be liable for paying minimum wage or overtime, a person or entity must be an “employer,” which the FLSA defines in section 3(d) to “include … any person acting directly or indirectly in the interest of an employer in relation to an employee.”

In 1958, the DOL published an interpretive regulation, codified in 29 CFR part 791, which explained that joint-employer status depends on whether multiple persons are “not completely disassociated” or “acting entirely independently of each other” with respect to the employee’s employment.

The DOL was concerned that part 791 did not provide adequate guidance for the most common joint-employer scenario under the act — where an employer “suffers, permits, or otherwise employs an employee to work, and another person simultaneously benefits from that work.”

In the joint-employer scenario where another person or entity is benefitting from the employee’s work, the DOL adopts a four-factor balancing test to assess whether the other person:

  1. Hires or fires the employee;
  2. Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
  3. Determines the employee’s rate and method of payment; and
  4. Maintains the employee’s employment records.

No single factor is decisive in determining joint-employer status; specifically, the maintenance of employment records alone does not demonstrate joint-employer status. The appropriate weight to be given to each factor will vary depending on the circumstances. Additional factors may be relevant for determining joint-employer status but should only be considered if they provide evidence whether the potential joint employer exercises significant control over the terms and conditions of the employee’s work.

To be a joint employer under the FLSA, the potential joint employer must exercise control — directly or indirectly — in respect of one or more of the four factors. The potential joint employer’s ability, power, or reserved right to act in relation to the employee may be relevant for determining joint employer status, but it is not enough simply to have the right to control these matters if such control has not been exercised.

In addition, the final rule provides that whether the employee is economically dependent on the potential joint employer is not relevant for determining the potential joint employer’s liability under the act. It is therefore not relevant to consider whether the employee: is in a job that requires special skills; has the opportunity for profit or loss; invests in equipment or materials required for work or the employment of helpers; or whether the potential joint employer has entered into contractual relationships, other than with the employer, to receive similar services.

What It Means

Here’s a summary of what the final rule means to buyers of staffing firms as well as their staffing providers.

Standard contractual clauses. By stating that control must be exercised in relation to one or more of the four factors, the DOL has removed the possibility that the mere existence of a “boilerplate” or standard clause in a staffing contract permitting the end client to remove or request the removal of a temporary member of the agency’s staff, will result in joint employment.

However, such reserved right to fire the employee at any time might be relevant in a joint-employment analysis if a potential joint employer also exercises direct control in setting the wage rate or the weekly work schedule for an employee.

Exercise of control. Control may be exercised by the potential joint employer either directly, or indirectly through an intermediary, such as a staffing agency. Indirect control occurs where the end client issues “mandatory directions” to the intermediary employer about employment policies and practices other than instructions related to quality control, legal obligations, or standards to protect the health and safety of the employees or public.  An intermediary agreeing to a mere request or recommendation, alone, is not enough for indirect control, but can be indicative in rare circumstances.

Instructions to meet the business’ needs. The DOL states that “businesses that contract for work to be performed by other entities must of necessity be able to indicate or even mandate the time and place of performance of that work that best meets their business needs and should be able to do so without incurring joint employer liability.” However, where the end-user business acts directly or indirectly to determine how employees’ schedules, routes or other working conditions will be altered or changed to meet their time and location needs, rather than leaving such decisions to the employer’s discretion, such actions may still be relevant to an analysis of joint-employer status.

Wage floors. The DOL acknowledges that although contractually requiring a wage floor or similar measures will generally not be determinative of joint employer status, there may be situations where such requirements may be relevant to a determination of joint-employer status in combination with other factors.

Quality control measures. The DOL also accepts that requiring, monitoring and enforcing a supplier’s compliance with quality control standards to ensure the consistent quality of a work product, brand or business reputation is not a business practice that makes joint employer status more or less likely.

Staffing agency scenario examples. Following comments on the example contained in the proposed rule, the DOL adopted two examples illustrating:

  1. That a staffing agency client exercising significant control over the scheduling and work performed by a temporary worker can qualify as an FLSA joint employer even though the staffing agency — rather than the client — determines the worker’s specific rate of pay; and
  2. Where a staffing agency client would not qualify as a joint employer, notwithstanding some limited supervision over the work performed by temporary workers to ensure basic quality, quantity and safety standards.

Joint employment has long been a concern of contingent workforce managers engaging temporary employees through a staffing agency. While the final rule only applies to the FLSA obligations to pay minimum wage and overtime, and does not clarify the issue with respect to other legislation, it does help to draw the boundaries of joint employment for employers. It makes findings of joint employment more difficult and should reduce minimum wage and overtime liability for buyers.