As part of the Wage Hour Division’s continuing focus on defining the employment relationships covered by the FLSA, the Division’s Administrator has issued an Administrators’ Interpretation (as well as a Fact Sheet) addressing joint employment relationships.  At the very least, the Interpretation suggests that the Division will be seeking to use the “joint employer” doctrine to pursue multiple entities – and “deeper pockets” – to address wage issues.

“Larger and More Established” Employers

The Administrator’s Interpretation notes that joint employment often involves one “larger and more established” employer “with a greater ability to implement policy or systemic changes to ensure compliance.”  In those cases, the Administrator suggests that the Wage Hour Division may hold the larger company responsible for “financial recovery” and “future compliance.”

The larger company’s financial resources are particularly relevant because joint employers are jointly and severally liable for violations. Therefore, if a smaller employer cannot pay amounts owed to its employees, the joint employer will be responsible the entire amount of wages.

Types of Joint Employment

In the Administrator’s Interpretation, the Wage Hour Division focuses on the concepts of horizontal and vertical joint employment under the FLSA.  Those terms appear to be taken from an opinion that the Ninth Circuit issued in a case litigated by the Department of Labor in 2003.  Chao v. A-One Medical Services, Inc., 346 F. 3d 908 (9th Cir. 2003).

The Wage Hour Division’s guidance and publications had not previously recognized these distinctions, and describe an analysis of horizontal employment relationships that differs from the economic realities test used by the Division on other contexts.

Horizontal Joint Employment

Horizontal joint employment exists where an employee has employment relationships with two or more companies that are related to each other.

Quoting 29 C.F.R. 791.2, the Administrator’s Interpretation states a horizontal joint employment relationship may exist in situations where: (1) employers share an employee’s services; (2) one employer acts in the interest of the other employer in relation to the employee; or (3) one employer controls the other employer and therefore shares control of the other employer.

The Administrator cites to the Fourth Circuit’s decision in Schultz v. Capital International Security, Inc., 466 F.3d 298, 306 (4th Cir. 2006) for the proposition that relevant criteria include whether the potential joint employers:

• have common ownership or management;

• share control over operations;

• have interrelated operations;

• supervise the work of the same employees;

• treat employees as part of a pool available to both of them;

• share clients or customers; and

• have any relevant agreements between them.

To illustrate the practical consequences of a horizontal joint employment relationship, the Administrator’s Interpretation offers the following example:

Example: Casey, a registered nurse, works at Springfield Nursing Home for 25 hours in one week and at Riverside Nursing Home for 25 hours during that same week. If Springfield and Riverside are joint employers, Casey’s hours for the week are added together, and the employers are jointly and severally liable for paying Casey for 40 hours at her regular rate and for 10 hours at the overtime rate. Casey should receive 10 hours of overtime compensation in total (not 10 hours from each employer).

As made clear by this example, horizontal joint employment is particularly significant in relation to wage-hour claims because the hours that an employee works for one employer may be added to the hours worked for the other joint employer to create overtime liability.

Vertical Joint Employment

Vertical joint employment is more common, and typically involves employment by staffing agencies, subcontractors, etc.

The Administrator’s Interpretation states that a threshold question in a vertical joint employment case is whether the individual’s immediate employer is actually an employee of the potentially joint employer. If no such relationship exists, an economic realities analysis should be applied to determine whether an employee of one company is economically dependent another entity involved in the same work.

The Interpretation states that the “economic realities” criteria used by courts differ, but often include:

• the use of the potential joint employer’s premises and equipment for work;

• the immediate employer’s history and ability to shift from one potential joint employer to another;

• whether the employee performs a discrete line-job that is integral to the potential joint employer’s production process;

• the potential joint employer’s ability to pass responsibility for the work from one intermediary to another without material changes for the employees;

• the potential joint employer’s supervision of the employee’s work; and

• the exclusivity of the relationship.

Conclusion

As with many other Administrator’s Interpretations, this interpretation primarily restates existing law.  However, the Administrator’s Interpretation reflects the priorities of the DOL, and it may be given deference by some courts.

For these reasons, employers would be wise to reexamine the extent to which they are “horizontal” joint employers with related companies, or “vertical” joint employers with outside vendors.  In particular:

• Related companies should take steps to avoid employing the same individual in any coordinated fashion, or to ensure that they are not violating the FLSA in the event they are found to be joint employers.

• Companies using outside vendors should review their relationships to comply with the economic realities test used by the Department of Labor.

• Companies should take steps to ensure that their vendors are reputable companies that will not only comply with wage-hour laws, but agree to indemnify them for any liability arising from a joint employment relationship — andy have the financial resources to fulfill that commitment.