Corporate Counselor
June 2016
In today’s global economy, many companies are staffing through employee brokers, leases, or temporary agencies, franchises, or other non-traditional arrangements. For instance, in 2013, the U.S. Bureau of Labor and Statistics estimated that 2,673,800 workers were employed in the temporary help services industry. Many of these contingent arrangements result in third-parties, such as the temporary staffing agency, employing the workers and not the company on whose behalf the work is being performed (the “putative joint employer,” i.e., where the temp is assigned). For instance, this is a common relationship that exists within the catering world in large metropolitan cities, such as New York City or alternatively in manufacturing distribution hubs, such as Memphis, Tennessee. These arrangements generally allow the putative joint employer to minimize or even avoid functions such as recruiting, screening, hiring, paying workers, and complying with labor and employment laws. This avoidance, however, often times comes with significant risks.
Over the last few years, government agencies have reacted to this trend by increasingly finding both companies are employers and as such, both are jointly and severally liable for any issue involving the employees. The National Labor Relations Board, Title VII of the Civil Rights Act of 1964, as amended, and the Occupational Safety and Health Administration (“OSHA”) have long been on board with this outcome. Not one to be left out, the federal Department of Labor (“DOL”) recently issued instructive administrative guidance on this exact issue.
I. DOL Guidance on Joint Employment
The DOL guidance focuses on the joint employer provisions already existing in both the Fair Labor Standards Act (“FLSA” – the federal wage and hour watchdog) and the Migrant and Seasonal Agricultural Worker Protection Act (“MSPA”). Although the MSPA is not applicable to many employers, the DOL nonetheless used its joint employer provisions to establish the DOL’s joint employer analysis.
The guidance focuses on the fact that because the word “employ” is defined so broadly by the FLSA and MSPA (“to suffer or permit to work”) that a wide range of companies related to the employment of workers might be considered joint employers. Next, the guidance introduces the two main categories of joint employment that determine what legal test is used in the analysis – horizontal or vertical joint employment.
Horizontal Joint Employment
Horizontal joint employment exists where an employee has a relationship with two companies that are related or associated with each other such that they both employ the worker. The focus is the relationship that the two companies have with each other (e.g., two restaurants that share employees) rather than either employer’s relationship with the employee.
According to the DOL guidance, the horizontal joint employer factors are:
- who owns the potential joint employers (i.e., does one employer own part or all of the other employer (e.g., parent subsidiary relationship) or do they have any common owners);
- do the potential joint employers have any overlapping officers, directors, executives, or managers;
- do the potential joint employers share control over operations (e.g., hiring, firing, payroll, advertising, overhead costs);
- are the potential joint employers’ operations inter-mingled (e.g., is there one administrative operation for both employers, or does the same person schedule and pay the employees regardless of which employer they work for);
- does one potential joint employer supervise the work for the other;
- do the potential joint employers share supervisory authority for the employee;
- do the potential joint employers treat the employees as a pool of employees available to both of them;
- do the potential joint employers share clients or customers; and
- are there any agreements between the potential joint employers regarding the workers.
Although not every factor must be met, the more factors that are present the more likely a finding of joint employer.
Vertical Joint Employment
Vertical joint employment exists where the employee has a relationship with one employer but he or she is economically dependent (paid by) the other entity. The focus is the relationship between the two companies and then the employee’s different relationships with each of the two companies (e.g., staffing agencies or labor providers). Vertical joint employment is most common for contingent workers.
For vertical joint employment to be found under the DOL guidance, two companies generally have an agreement or arrangement whereby one company supplies employees to the other (the latter being the putative joint employer since the employee actually performs work for this entity). However, before beginning the joint employer analysis, be sure the workers are not actually employees misclassified as independent contractors. If this is the case, you will never get to a joint employer analysis but rather merely an employer analysis. If this concept makes no sense to you, seek counsel to make sure you have not fallen into this trap.
Assuming the workers are not employees, the next step is to perform an economic realities test. The key is whether the worker is economically dependent on the putative joint employer. The MSPA sets forth a seven-factor economic realities test although different jurisdictions and different agencies use different versions of this same idea:
- who directs, controls, or supervises the work performed;
- who controls employment conditions (e.g., pay rate, schedules);
- the permanency and duration of relationship (i.e., the more definite/full-time the relationship between employee and putative joint employer, the more likely a joint employer finding);
- whether the nature of the work is repetitive and rote (i.e., the more repetitive, rote, and unskilled the work, the more likely a joint employer finding);
- whether the work is integral to the putative employer’s;
- whether the work is performed on premises; and
- who performs administrative functions commonly performed by employers.
Again, although not every factor must be met, the more factors found the more likely a finding of joint employment.
II. National Labor Relations Board’s (NLRB) Joint Employer Standard
For over 30 years, the NLRB found two entities joint employers if they shared or codetermined matters governing the essential terms and conditions of employment and actually exercised this power. Where one entity had direct and immediate control over various aspects of employment over the other entity’s employees including such things as supervision, scheduling, hiring, firing, or directing those employees, these entities would be joint employers. However, after Browning-Ferris Industries of California, Inc, the NLRB now considers whether an employer has exercised control over terms and conditions of employment indirectly through an intermediary, or even if it has reserved the authority to do so. In other words, if an employer has the ability to exercise control, but did not use that authority, it can be found a joint employer. This standard vastly expands the range of employers that could be subject to joint employer status and could expose them to significant monetary damages for the actions of the other joint employer. This type of joint employment is a hot topic in the franchisor/franchisee world and is currently pending before the NLRB in the McDonald’s USA, LLC case.
Despite these significant ramifications, the Browning-Ferris decision is limited in its scope. The NLRB’s decision was fact-specific. The case centered on the employer’s (“BFI’s”) use of Leadpoint, a temporary staffing agency. The NLRB found BFI was the joint employer with Leadpoint. It relied on the indirect and direct control BFI possessed over the essential terms and conditions of employment of Leadpoint’s workers and BFI’s reserved authority to control these terms and conditions. This case was the traditional temporary employment agency case. However, in the McDonald’s case, the NLRB is trying to expand Browning-Ferris to apply to a franchising relationship. The NLRB’s underlying theory is McDonald’s alleged indirect ability to control franchisees through technology offerings creates the joint employer relationship. If the NLRB prevails, the world of franchising could be turned upside down!
III. Joint Employer Liability under Title VII
Title VII of the 1964 Civil Rights Act generally prohibits employers from discriminating against employees on the basis of sex, race, color, national origin, and religion. The practical concern in the joint employer arena is if a primary employer makes racially insensitive comments about its employees, will the joint employer be liable?
Most recently, in Faush v. Tuesday Morning, the Third Circuit Court of Appeals adopted the ERISA joint employer test from the US Supreme Court’s Nationwide Mutual Insurance Co. v. Darden decision. In Faush, Plaintiff was employed by a staffing agency and assigned to work at the defendant (the putative employer), where he claimed he was subjected to racially discriminatory comments and terminated because of his race. He brought an employment discrimination suit under Title VII against the putative employer. The key factors used to make the joint employer determination were: whether the skills used at both companies were similar, the source of the instrumentalities and tools used by the employee was the putative employer, the work was performed at the putative employer’s business, the duration of the relationship between the parties was ongoing, and the putative employer had the right to assign additional projects to the employee. Weighing all these factors (no single factor is dispositive), the court determined there was enough evidence of joint employment to defeat the putative employer’s summary judgment motion.
In another civil rights case, the Fourth Circuit Court of Appeals in Butler v. Drive Automotive Industries adopted a similar test to Faush but it considered eleven factors. In that case, Plaintiff was hired by a temp agency to work at Drive Automotive, where she claimed she was subjected to verbal and physical sexual harassment and was terminated as a result of her complaints to both companies. The factors considered are similar to those in the Third Circuit test, but the Court noted that the first four factors (who had authority to hire and fire employees; day-to-day supervision of the employee, including disciplining the employee; who furnished the equipment used by the employee; and the actual workplace used by the employee) were the most important. The element of control over the employee remained the “principal guidepost” in the analysis. Weighing these factors, the Court found Drive Automotive was a joint employer and therefore subject to Title VII liability.
IV. Joint Employers under Wage and Hour Laws – Before the New Guidelines Were Created
While the federal DOL created guidelines to address the joint employer situation, wage and hour case law also addresses this concern. The federal Fair Labor Standards Act (FLSA) generally establishes minimum wage, overtime pay, recordkeeping, and youth employment standards for private sector and government employees. If one employer fails to properly pay employees for overtime, the joint employer could be liable for that overtime pay. In today’s world, these cases can involve immense liability and are probably the fastest growing area of litigation.
In this context, many courts have cited the Ninth Circuit’s opinion in Bonnette v. California Health and Welfare Agency as the foundational test for FLSA joint employer liability. In that case, the Court addressed the issue of whether a state welfare agency was a joint employer of domestic in-home caregivers, and found that they were, based on the level of control they possessed. The test examines whether the putative employer had the power to hire and fire the employees, supervise and control employee work schedules or conditions of employment, determine the rate and method of payment, and maintain employment records.
The Second Circuit originally adopted those four factors, but has since added six additional factors in a 2003 case entitled Zheng v. Liberty Apparel. Among the additional factors, the key ones are whether the employee used the putative employer’s premises and equipment, the transferability of a contract (for the employees) among multiple putative employers, and the degree of supervision from the putative employer. In that case, the plaintiffs were factory workers employed by contractors doing business at the same factory. When one of those employees was not paid thousands of dollars in alleged wages, the employee sued the contractors and Liberty Apparel as joint employers. Because the District Court had exclusively considered the four Bonnette factors, the Second Circuit remanded the case so the additional factors could also be considered. As in the Title VII context, these multi-factor tests are fact-specific and could produce variable outcomes. The tests leave judges with broad discretion.
V. Consequences of Joint Employer Findings
Legally, if the temporary staffing agency and the location at which the contingent employee is assigned or franchisor and franchisee are joint employers, both companies are held jointly and severally liable. Practically, many employers have agreements with temp agencies/staffing companies stating that the agencies are responsible for compliance with all labor and employment laws. Assuming the agreement is enforceable, the putative employer would be able to turn to the other employer, if any liability is found against the putative employer. But if one employer goes out of business, the other one will be left holding this very expensive bag!
Therefore, it is important for putative employers who choose to employ contingent workers to understand the risks associated with such employment relationships and to negotiate an arrangement that adequately protect the putative employer. For instance, if a putative employer determines that it can benefit from contingent workers services without controlling the assignments, pay and other indicators of an employment relationship, it should closely scrutinize its contract with the temporary staffing agency to make sure that is clear. However, practically, this is a difficult task as the putative employer more times than not is the only entity in the position of directing and supervising the contingent workers’ day to day work. For instance, a catering captain directs the contingent server to work a particular wedding and provides instructions on serving etc. As such, under the existing law, any company choosing to employ temporary or contingent workers must face the likely reality that they are a joint employer with the staffing company. This means they must be prepared to claim their spot as the employer, in the event the temporary staffing agency leaves them holding the bag.
