New Ruling Impacts Related Companies Who Share Employees, Particularly When Using Third Party Staffing Services

By: Alexander J. Mezny

On January 20, 2016, the US Department of Labor (“DOL”) issued an Administrator Interpretation departing from the traditional joint employment tests with the express intent to ensure that “the scope of employment relationships and joint employment under the FLSA … is as broad as possible.” The DOL seeks to address the increasing use of businesses “sharing [so-called “horizontal employment”] or using third-party management companies, independent contractors, staffing agencies, or labor providers [so-called “vertical employment”].”

Employers who share employees should be mindful that the DOL will aggregate hours which can cause overtime claims. Employers who use third party labor sources should ensure those sources are in compliance with wage and hour laws as the DOL may prosecute the end employer as well as the noncompliant staffing agency.

Horizontal Joint Employment

The horizontal joint employment analysis focuses on the relationship between the two potential joint employers. To determine whether a horizontal joint employment relationship exists, the DOL looks at the following factors:

• Who owns the potential joint employers;
• Whether the potential joint employers have any overlapping officers, directors, executives, or managers;
• Whether the potential joint employers share control over operations;
• Whether the potential joint employers’ operations are intermingled;
• Whether one potential joint employer supervises the work of the other;
• Whether the potential joint employers share supervisory authority for the employee;
• Whether the potential joint employers treat the employees as a pool of employees available to both of them;
• Whether the potential joint employers share clients or customers; and
• Whether there are any agreements between the potential joint employers.

Vertical Joint Employment

Vertical joint employment exists where the employee has an employment relationship with one employer (e.g., staffing agency, subcontractor, or labor provider) and the economic realities show that he or she is economically dependent on, and thus employed by, another entity involved in the work (potential joint employer).

In evaluating the economic realities, the DOL states that it will look at the following seven factors related to economic dependence:

• The extent to which the work performed by the employee is controlled or supervised by the potential joint employer “beyond a reasonable degree of contract performance oversight”;
• The extent to which the potential joint employer has the power to hire or fire the employee, modify employment conditions, or determine the rate or method of pay;
• Whether the relationship is indefinite, permanent, full-time, or long-term;
• Whether the work is repetitive and rote, is relatively unskilled, and/or requires little or no training;
• Whether the work is integral to the potential joint employer’s business;
• Whether the work is performed on the potential joint employer’s premises; and
• The extent to which the potential joint employer performs administrative functions for the employee, such as handling payroll, providing workers’ compensation insurance, providing necessary facilities and safety equipment, housing, or transportation, or providing tools and materials required for the work.

In analyzing whether a horizontal or vertical joint employment relationship exists, the DOL states that the relationship agreed upon by the potential joint employers is not relevant to the determination of joint employment status. In a departure from past precedent, the DOL now will find joint employment even “where the alleged [joint] employer exercised little or no control or supervision over the putative employees.”

If you have any questions concerning the application of these new rules to your business please consult one of our employment attorneys.