Last month, US Department of Labor Administrator David Weil provided additional guidance on how joint employment is established in cases brought under the Fair Labor Standards Act (FLSA) and Migrant and Seasonal Agricultural Worker Protection Act (MSPA).
The guidance defines two types of joint employment relationships: horizontal and vertical. The structure and nature of the relationship determines which type of joint employment exists, but in circumstances where a company contracts workers who are directly employed by an intermediary (i.e. a staffing company or a sub-contractor), joint employment will be vertical.
Vertical Joint Employment
Analysis under the FLSA or MSPA as to whether there is vertical joint employment between the company contracting the workers and the intermediary providing the workers, should review the economic realities of the relationships between the parties in the broadest sense. The intention is to determine whether the workers are economically dependent on the contracting employer, and are thus their employees.
The analysis requires a broad examination of a number of factors identified specifically in relation to cases under the MSPA, which are equally applicable for the FLSA. The guidance suggests that in vertical joint employment cases, the contracting employer will typically arrange with the intermediary employer to provide it with labor, and/or perform some employer functions on its behalf, such as hiring and payroll.
However before conducting a vertical joint employment analysis, it is crucial to determine whether the intermediary employer is itself an employee of the contracting employer. If it is, then any individuals employed by the intermediary will also be employees of the contracting employer and there is no need to make any further enquiries. This scenario applies to situations where a company uses the services of an independent contractor who sub-contracts the performance of the work to other workers. Establishing whether the intermediary is an employee of the contracting client is not, however, relevant where a staffing company is the intermediary.
Establishing Economic Dependence
In circumstances where the workers are directly employed by a staffing company and supplied to work for the potential joint employer, the administrator’s interpretation states that the analysis involves a consideration of whether there is evidence of the workers’ economic dependence on the contracting company, in relation to the following seven factors:
- Directing, controlling or supervising the work performed. If the employee’s work is controlled or supervised by the potential joint employer beyond what might be considered a reasonable degree of oversight of contract performance, this level of control might be indicative of economic dependence. It is not necessary for the control to be exercised directly as the control might be exercised through the intermediary employer; and such control need not be greater or even the same as the intermediary employer, to be sufficient evidence of economic dependence.
- Controlling employment conditions. Where the potential joint employer has the power to hire or fire the employee, modify employment conditions, or determine the rate or method of pay, this level of control over the conditions of their employment might indicate economic dependence.
- Permanency and duration of the relationship. While tenure limits are not indicative of joint employment in isolation, an indefinite or long-term full-time relationship between the employee and the contracting employer may be an indicator of economic dependence. However it is important to consider the context in which the relationship exists as seasonal, intermittent or part-time work may still be considered to be indicative of economic dependence in an industry sector that is characterized by such type of work.
- Repetitive and rote nature of the work. The guidance suggests that economic dependence is more likely where the work is repetitive and relatively unskilled, requiring little or no training.
- Integral to the business. Where the work performed by the employee is integral or core to the business carried on by the potential joint employer, this has been established in case law as far back as 1947 as being an indicator of economic dependence.
- Work performed on the premises. Where the work performed by the employee takes place on premises owned, leased or simply controlled by the contracting employer this will indicate the economic dependence of the employee on the potential joint employer.
- Performing administrative functions commonly performed by employers. If the potential joint employer carries out functions that would normally be exercised by an employer, such as handling payroll, providing workers’ compensation insurance, providing facilities or transportation or providing the tools and equipment necessary for the job, the exercise of those functions may indicate economic dependence leading to joint employment.
The guidance points out that different courts apply a variation of these factors depending on the jurisdiction of the court but they are all consistent with the broad scope of employment under the FLSA.
Implications for the Staffing Ecosystem
In essence, the guidance does little more than clarify and condense established case law, but in doing so, it provides a useful explanation of the scope of enquiries made by the Wage and Hour Division of the Department of Labor, in considering cases of joint employment under the FLSA.
The more important issue for employers wishing to use labor contracted from staffing agencies is to consider the level of risk presented by using employees supplied by a staffing partner and the implications of a finding of joint employment.
First, these employees already have an employer: the staffing firm. Joint employment is only an issue if that employer does not fulfill its responsibilities toward the employee and the authorities. It is therefore important that the contracting employer undertakes proper due diligence to confirm that its chosen staffing partner is compliant with the various laws which carry a risk of joint employment liability.
Second, in one very important respect, joint employment can provide protection for the contracting employer. In the context of claims by workers suffering accidents or injury and seeking a remedy from the contracting employer, workers’ compensation insurance provides employees with an exclusive remedy from an employer. If it is found that the contractor is not the worker’s employer and they are not therefore covered by the contractor’s workers’ compensation insurance, the worker has the potential to make a much larger claim for compensation.
The threat of liability should not deter employers from using staffing agency employees, if that is the right strategy for the business. Many staffing arrangements will provide sufficient evidence of economic dependence, for the contracting employer to be a joint employer with the staffing agency. To alter the nature of the staffing arrangements, in order to reduce the risk of being found to be a joint employer, may not be the most effective way of operating the business. A better approach is to acknowledge the fact of joint employment and to mitigate the potential liabilities involved with being a joint employer by ensuring that staffing partners are compliant employers, and taking steps to ensure that those temporary employees are entitled to only those benefits which the employer considers to be reasonable for them to have.
The decision in Vizcaino v Microsoft in the 1990s, although decided in the context of common law and a different set of factors, still provides a lesson for employers to take care in drafting benefit plans. Microsoft had no intention of extending ERISA benefits to those workers it misclassified as independent contractors, but once the company accepted they were its employees, those workers were entitled to the benefits provided to Microsoft’s employees. By law, temporary employees could have been excluded, but the wording in the plan documents was insufficiently clear to support Microsoft’s argument against their eligibility, so the court, using the contra proferentum rule, ruled against Microsoft.
For businesses using flexible labor to carry out work that is integral to their business, it is best to assume the risks of joint employment are inevitable, and take steps to mitigate or reduce the risks as far as possible.