Joint Employer Liability, 1120 SCBJ, SC Lawyer, November 2020, #46

• Author: By Katherine Walker
• Position: Vol. 32 Issue 3 Pg. 46

Joint Employer Liability

Vol. 32 Issue 3 Pg. 46

South Carolina BAR Journal

November, 2020

By Katherine Walker

For the first time in 50 years, the United States Department of Labor (DOL) has published a new “employer- friendly” standard for determining whether two entities are “joint employers” for purposes of liability under the Fair Labor Standards Act. The new rule, published at 29 C.F.R. § 791, took effect on March 16, 2020, and is expected to have a significant impact on joint employer status. The issue of joint employer liability has historically caused much confusion, been frequently litigated, and been the subject of inconsistent court decisions. According to the DOL, the changes in the new rule are “designed to reduce uncertainty over joint employer status and clarify for workers who is responsible for their employment protections, promote greater uniformity among court decisions, reduce litigation, and encourage innovation in the economy.”1^[1]

What is a joint employer?

What is a joint employer? In certain circumstances, two different companies can both be considered the employer of a worker with joint obligations to comply with federal and state employment laws with respect to those employees.

The question of joint employer status can arise in many scenarios such as (1) staffing agencies providing temporary labor, (2) franchisors and franchisees, or (3) outsourcing companies that provide workers to businesses. When Company 1 exercises some control over the actions or work of Company 2’s employees, it raises the question as to whether the employees are actually working for Company 1 or Company 2 or both Company 1 and 2.

Consider, for example, a fast food franchisor who institutes training requirements for a franchisee’s cooks to ensure certain standards are met with regard to food preparation. Does providing training to cooks mean that the franchisor is liable as an employer if the franchisee doesn’t properly pay the cooks overtime?

Or consider a company that outsources all customer service call center workers to a staffing agency and allocates the responsibility for training, supervising, disciplining, and paying those workers to the staffing agency. If the call center employee faces discrimination at work, should the company or the staffing agency (or both) be liable to the employee for the discriminatory conduct?

Or consider a maintenance worker who provides services to an apartment complex for the benefit of the owners of the complex but who is hired by the company that contracted to provide property management services for the complex. If the maintenance worker is improperly terminated for taking medical leave, who should be responsible as the employer of the worker?

Answers to these questions have historically not been clear or consistent. In Salinas v. Commercial Interiors, Inc., the Fourth Circuit Court of Appeals noted that “courts have had difficulty developing a coherent test distinguishing ‘separate employment’ from ‘joint employment’ . . . [and] court’s attempts to distinguish separate employment from joint employment have spawned numerous multifactor balancing tests, none of which has achieved consensus support.”^[2]

Prior federal guidance

Under the Obama administration, the DOL took an expansive view of joint employer liability, and courts generally seemed more willing than not to find joint employer liability, even if there was no clear consensus among courts on the factors to consider.

Browning-Ferris (NLRB)

In 2015, the National Labor Relations Board (“NLRB”) issued Browning-Ferris Industries of California, Inc., 362 N.L.R.B. No. 186 (2015), which broadened the standard for assessing joint employer status under the National Labor Relations Act. For more than 30 years prior to 2015, the N.L.R.B. consistently maintained that a joint employer relationship existed only where “two separate entities share or codetermine those matters governing the essential terms and conditions of employment.”^[3] To support a joint employer finding, the N.L.R.B. required evidence that a potential joint employer “meaningfully affect[ed]” matters relating to the employment relationship and that its control over such matters was “direct and immediate.”^[4]

In 2015, the N.L.R.B. expressly overruled this extensive precedent, outlining a new, two-factor test for determining joint-employer status.^[5] Browning-Ferris, 362 N.L.R.B. No. 186. The NLRB’s new Browning-Ferris standard would evaluate: • Whether a common-law employment relationship exists; and

• Whether the putative joint employer “possesses sufficient control over employees’ essential terms and conditions of employment to permit meaningful bargaining.^[6]

In applying both prongs of the test, the N.L.R.B. announced it would no longer require “direct and immediate” control over workers to establish a joint employer relationship. Instead, it would consider both reserved and indirect control, such as through an intermediary or through contractual provisions that reserve the right to control, as potentially sufficient evidence to establish a joint-employer relationship, regardless of whether the right to control is ever exercised.^[7]

The new Browning-Ferris test was criticized by employer groups as vague and impractical. Under this test, a company could be liable as a joint employer if it had a right to exercise indirect control over an employee regardless of whether it ever exercised that right.

WHD

In 2016, the DOL Wage and Hour Division (“WHD”) published Administrator’s Interpretation No. 2016-1 providing guidance on joint employment under the Fair Labor Standards Act (“FLSA”) and Migrant Seasonal Agricultural Worker Protection Act (“MPSA”).^[8] In this 2016 guidance, the WHD noted that the joint employment analysis must look at both control and the “economic realities,” and the WHD concluded the following seven factors were relevant to this analysis: • Directing, controlling, or supervising the work performed;

• Controlling employment conditions;

• Permanency and duration of relationship;

• Repetitive and rote nature of work;

• Integral to business;

• Work performed on premises; and

• Performing administrative functions commonly performed by employees.^[9]

The WHD focused on the “economic dependence” of the workers in evaluating joint employer liability such as: “(1) use of the potential joint employer’s premises and equipment for the work; (2) whether the intermediary employer has a business than can and does shift from one joint employer for another, (3) whether the employee performs a discrete line-job that is integral to the potential joint employer’s production process, (4) whether the potential joint employer could pass responsibility for the work from one intermediary to the other without material changes for the employees; (5) the potential joint employer’s supervision of the employee’s work, and (6) whether the employee works exclusively or predominantly for the potential joint employer.”^[10]

Fourth Circuit

In 2015, the Fourth Circuit adopted a nine-factor test to determine joint employer liability in Title VII claims.^[11] In this case, the plaintiff sought to recover for sexual harassment she allegedly experienced while working at a Drive Automotive Industries (“Drive”) factory and while she was employed by a temporary staffing agency, ResourceMFG.^[12] The Butler court determined that the following factors should be considered in determining joint employer status for purposes of Title VII claims • Authority to hire and fire the individual;

• Day-to-day supervision of the individual, including employee discipline;

• Whether the putative employer furnishes the equipment used and the place of work;

• Possession of and responsibility over the individual’s employment records, including payroll, insurance, and taxes;

• The length of time during which the individual has worked for the putative employer;

• Whether the putative employer provides the individual with formal or informal training;

• Whether the individual’s duties are akin to a regular employee’s duties;

• Whether the individual is assigned solely to the putative employer; and

• Whether the individual and putative employer intended to enter into an employment relationship.^[13]

In 2017, the Fourth Circuit adopted a six-factor test to determine joint employer liability in wage claims.^[14] The Salinas case related to the wage claims of employees who were directly employed by J.I. General Contractors, Inc. (“J.I.”), a framing and drywall installation subcontractor who worked almost exclusively for Commercial Interiors, Inc. (“Commercial”), a company that provided general contracting and interior finishing services.^[15] The Salinas court evaluated whether J.I. and Commercial were joint employers under the facts of the case, and the Fourth Circuit announced its own test, which found joint employment status where: “(1) two or more persons or entities share, agree to allocate responsibility for, or otherwise codetermine—formally or informally, directly or indirectly—the essential terms and conditions of a worker’s employment and (2) the two entities’ combined influence over the essential terms and conditions of the worker’s employment render the worker an employee as opposed to an independent contractor.” ^[16] The Court of Appeals also set forth six non-exclusive factors that district courts should consider when applying the test: • Whether, formally or as a matter of practice, the putative joint employers jointly determine, share, or allocate the power to direct, control, or supervise the worker, whether by direct or indirect means;

• Whether, formally or as a matter of practice, the putative joint employers jointly determine, share, or allocate the power to— directly or indirectly—hire or fire the worker or modify the terms or conditions of the worker’s employment;

• The degree of permanency and duration of the relationship between the putative joint employers;

• Whether, through shared management or a direct or indirect ownership interest, one putative joint employer controls, is controlled by, or is under common control with the other putative joint employer;

• Whether the work is performed on a premises owned or controlled by one or more of the putative joint employers, independently or in connection with one another; and

• Whether, formally or as a matter of practice, the putative joint employers jointly determine, share, or allocate responsibility over functions ordinarily carried out by an employer, such as handling payroll; providing workers’ compensation insurance; paying payroll taxes; or providing the facilities, equipment, tools, or materials necessary to complete the work.^[17]

Applying the facts to these six factors, the Salinas court determined that J.I. and Commercial were joint employers of the employees based on Commercial’s control of the employees and the employees’ financial dependence on Commercial.^[18]

New DOL rule

In the new DOL rule, if Company 1 benefits from the work of another Company 2’s employees, Company 1 is the employee’s joint employer “only if [Company 1] is acting directly or indirectly in the interest of the employer in relation to the employee.”^[19] Specifically, the DOL adopts a four-factor balancing test to determine joint employer status and states that the following “four factors are relevant to the determination” as to whether Company 1 is a joint employer for purposes of FLSA: • Hires or fires the employee;

• Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;

• Determines the employee’s rate and method of payment; and

• Maintains the employee’s employment records.^[20]

The DOL doesn’t view any single factor as dispositive, but instead states that “[w]hether a person is a joint employer under the Act will depend on how all the facts in a particular case relate to these factors, and the appropriate weight to give each factor will vary depending on the circumstances of how that factor does or does not suggest control in the particular case.”^[21]

Unlike prior decisions and guidance that allowed for joint employer liability if there was the potential for indirect control (even if that control was never exercised), the new rule requires that the potential employer actually exercise “substantial” control over an employee in order to be liable as a joint employer.

The new DOL rule contradicts prior decisions and guidance that focused on the economic realities and financial dependence by providing that, “[w]hether an employee is economically dependent on the potential joint employer is not relevant for determining the potential joint employer’s liability under the Act. Accordingly, to determine joint employer status, no factors should be used to assess economic dependence.”^[22]

The new DOL rule goes on to offer clear guidance that is helpful to employers who are trying to avoid pitfalls that could result in joint employer liability: • Operating as a franchisor or entering into a brand and supply agreement, or using a similar business model does not make joint employer status more likely under the Act.

• The potential joint employer’s contractual agreements with the employer requiring the employer to comply with specific legal obligations or to meet certain standards to protect the health or safety of its employees or the public do not make joint employer status more or less likely under the Act. Similarly, the monitoring and enforcement of such contractual agreements against the employer does not make joint employer status more or less likely under the Act. Such contractual agreements include, but are not limited to, mandating that employers comply with their obligations under the FLSA or other similar laws; or institute sexual harassment policies; requiring background checks; or requiring employers to establish workplace safety practices and protocols or to provide workers training regarding matters such as health, safety, or legal compliance. Requiring the inclusion of such standards, policies, or procedures in an employee handbook does not make joint employer status more or less likely under the Act.

• The potential joint employer’s contractual agreements with the employer requiring quality control standards to ensure the consistent quality of the work product, brand, or business reputation do not make joint employer status more or less likely under the Act. Similarly, the monitoring and enforcement of such agreements against the employer does not make joint employer status more or less likely under the Act. Such contractual agreements include, but are not limited to, specifying the size or scope of the work project, requiring the employer to meet quantity and quality standards and deadlines, requiring morality clauses, or requiring the use of standardized products, services, or advertising to maintain brand standards.

• The potential joint employer’s practice of providing the employer a sample employee handbook, or other forms, to the employer; allowing the employer to operate a business on its premises (including “store within a store” arrangements); offering an association health plan or association retirement plan to the employer or participating in such a plan with the Landex Research, Inc. employer; jointly participating in an apprenticeship program with the employer; or any other similar business practice, does not make joint employer status more or less likely under the Act.^[23]

The new DOL rule is generally considered to be more “employer- friendly” than prior court decisions and federal guidance. According to Wage and Hour Division Administrator Cheryl Stanton, “The changes in this final rule break down barriers that keep companies from constructively overseeing, guiding and helping their business partners . . . For small business owners, and the employees working in those businesses, the relationship and the guidance coming from franchisors and other contracting companies can greatly improve the workplace and help them create jobs.”^[24]

New N.L.R.B. Rule

On February 25, 2020, the N.L.R.B. released its final rule clarifying joint employer status under the National Labor Relations Act, and the rule went into effect on April 27, 2020.^[25] The new N.L.R.B. rule applies to the right and obligations under the NLRA relative to collective bargaining, strike activity, and unfair labor practice liability. By issuing a new N.L.R.B. rule, the N.L.R.B. intended to clarify the law after “[t] he Board’s 2015 decision in Browning- Ferris unsettled the law in this vitally important area by holding that a company could be deemed a joint employer if its control over the essential terms and conditions of another business’s employees was merely indirect, limited and routine, or contractually reserved but never exercised.” ^[26] The new N.L.R.B. rule makes the following changes: • That a business is a joint employer of another employer’s employees only if the two employers share or codetermine the employees’ essential terms and conditions of employment;

• Clarifies the list of essential terms and conditions: wages, benefits, hours of work, hiring, discharge, discipline, supervision, and direction;

• Provides that to be a joint employer, a business must possess and exercise such substantial direct and immediate control over one or more essential terms and conditions of employment of another employer’s employees as would warrant a finding that the business meaningfully affects matters relating to the employment relationship;

• Specifies that evidence of indirect and contractually reserved but never exercised control over essential terms and conditions, and of control over mandatory subjects of bargaining other than essential terms and conditions, is probative of joint-employer status, but only to the extent that it supplements and reinforces evidence of direct and immediate control;

• Defines the key terms used in the final rule, including what does and does not constitute “substantial direct and immediate control” of each essential employment term; November 2020 53

• Makes clear that joint-employer status cannot be based solely on indirect influence or a contractual reservation of a right to control that has never been exercised.^[27]

What does this mean for South Carolina?

The new DOL and N.L.R.B. rules provide much-needed clarity on the issue of joint employer liability. In large part, the new rules are consistent even if there are slight differences in the factors to be considered.

The introductory statement for the new DOL rule, found at 29 C.F.R. § 791.1, states that it is intended to be used by courts “to understand employers’ obligations and employees’ rights under the Act.”^[28] However, the new rules specifically apply to joint employer status under FLSA or NLRA, and, by themselves, they do not overrule any court decisions or apply to other federal employment laws.

In particular, the new DOL and N.L.R.B. rules do not apply to Title VII claims of discrimination and harassment. However, the Equal Employment Opportunity Commission (“EEOC”) published a notice in the fall of 2019 stating that the EEOC will propose an amendment to “clarify when an entity is covered under the federal EEO laws as a joint employer, and consolidate the EEOC’s position on the topic to regulatory locations that are easier for the public to find.”^[29]Until new guidance is issued by the EEOC, the Butler nine-factor test will likely continue to apply to Title VII claims in the Fourth Circuit.^[30]

It remains to be seen how much weight the Fourth Circuit (which adopted its own six-factor test discussed above for determining joint employer liability in Salinas v. Commercial Interiors, Inc., 848 F.3d 125 (4th Cir. 2017)) will give to the DOL rule. For example, the six-factor balancing test adopted by the Salinas court for wage claims includes an evaluation of the economic dependence on the potential joint employer, although the new rule specifically states economic dependence factors shouldn’t be considered. However, given that the Fourth Circuit relied heavily on the DOL regulations and guidance in the Salinas decision, it seems likely that the Fourth Circuit will modify its analysis and adopt the new DOL rule when this issue comes before the court again.

What can employers do?

Although the new DOL and N.L.R.B. rules are a positive development and provide helpful guidance, they only apply to FLSA and NLRA claims. Additionally, it remains to be seen how courts will apply the new rules. Therefore, employers should still exercise caution as it relates to third parties’ employees. Below are a few examples of steps that companies can take to attempt to protect themselves from joint employer liability: • Include language in contracts with staffing agencies, outsourcing companies and franchisees expressly providing that your company is not the employer of the others’ employees and does not control the terms and conditions of employment of the other’s employees.

• Adopt practices and procedures which avoid actual and perceived control over another’s employees. Your company should not control the other’s payroll, benefits, schedules, hiring, firing, training, performance reviews and employment records.

• Make it clear to the workers that they are not employees of your company. Don’t treat the workers the same as employees.

• Investigate staffing agencies, outsourcing companies and franchisees to determine whether they can be relied upon to enforce the federal and state employment laws and requirements in the vendor agreements requiring such compliance.

• Require indemnification provisions in contracts with staffing agencies, outsourcing companies and franchisees to protect you if an employee alleges joint employer liability.

Katie Walker is Of Counsel at Ethridge Law Group. Her practice focuses on general civil litigation, including employment law, construction litigation, insurance coverage and bad faith, personal injury defense, professional liability defense, and commercial litigation.

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Notes:

[1] ^[1] U.S. Dep’t of Labor, Wage & Hour Div., Fact Sheet: Notice of Proposed Rulemaking on Joint Employer Status under the FLSA (Apr. 2019) (https://www.dol.gov/sites/dolgov/fles/ WHD/legacy/fles/joint-employment_fact-sheet.pdf).

[2] ^[2]848 F.3d 125, 135 (4^th Cir. 2017).

[3] ^[3]CNN America,

Inc., 361 N.L.R.B. No. 47 (2014) (citing TLI, Inc., 271 N.L.R.B. No. 128 (1984).

[4] ^[4]AM Property

Holding Corp, 350 N.L.R.B. No. 80 (2007).

[5] ^[5] Browning-Ferris, 362 N.L.R.B. No. 186 (2015).

[6] ^[6]Id.

[7] ^[7]Id.

[8] ^[8]U.S. Dep’t of Labor, Wage & Hour Div., Administrator’s Interpretation No. 2016-1: Joint Employment under the Fair Labor Standards Act and Migrant and Seasonal Worker Protection Act (Jan. 2016).

[9] ^[9]Id.

[10] ^[10]Id. (citing Zheng v. Liberty Apparel

Co., 355 F.3d 61, 71-72 (2^nd Cir. 2003)).

[11] ^[11]Butler v.

Drive Automotive Industries

of America, Inc., 793 F.3d 404 (4th Cir. 2015).

[12] ^[12]Id. at 406.

[13] ^[13] Id. at 414.

[14] ^[14] Salinas v.

Commercial Interiors, Inc., 848 F.3d 125 (4th Cir. 2017).

[15] ^[15]Id. at 129.

[16] ^[16]Id. at 129-30.

[17] ^[17]Id. at 141.

[18] ^[18] Id. at 145-46.

[19] ^[19] 29 C.F.R. § 791.2(a)(1) (2020).

[20] ^[20] Id.

[21] ^[21] 29 C.F.R. § 791.2(a)(3) (2020).

[22] ^[22] 29 C.F.R. § 791.2(c) (2020).

[23] ^[23] 29 C.F.R. § 791.2(d)(2-4) (2020)

[24] ^[24] News Release, U.S. Dep’t of Labor, Wage & H our Div., U.S. Department of Labor Issues Final Rule to Update FLSA’s Joint Employer Regulations (Jan. 12, 2020), https:// www.dol.gov/newsroom/releases/whd/ whd20200112.

[25] ^[25]Nat’l Lab. Rel. Bd., Fact Sheet: Joint Employer Final Rule (2020), https://www. nlrb.gov/sites/default/fles/attachments/ basic-page/node-7581/fact-sheet-joint-employer-fnal-rule.pdf.

[26] ^[26] Id.

[27] ^[27] Id.

[28] ^[28] 29 C.F.R. § 778.1 (2019).

[29] ^[29] U.S. Equal Emp. Opportunity Comm’n (“EEOC”), Joint Employer Status Under the Federal Equal Employment Opportunity Statutes (2019), https://www.reginfo. gov/public/do/eAgendaViewRule?pu-bId=201910&RIN=3046-AB16.

[30] ^[30]Butler v.

Drive Automotive Industries

of America, Inc., 793, F.3d 404, 414 (4th Cir. 2015).

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