New Joint Employer Rule under Fair Labor Standards Act

See how this new joint-employer rule affects California employers.
See how this new joint-employer rule affects California employers.
See how this new joint-employer rule affects California employers.

On January 13, 2020, the U.S. Department of Labor (DOL) issued its final rule updating its regulations regarding joint-employer status under the Fair Labor Standards Act (FLSA). This new rule is scheduled to be effective on March 16, 2020. It updates and clarifies the circumstances in which an employee, under the FLSA, may have joint employers who can be held jointly and severally liable for wage and hour obligations, such as minimum wage and overtime payments.

Four-Factor Balancing Test

The new rule creates a four-factor balancing test focused on whether the potential joint employer exercises substantial control over the terms and conditions of the employee’s work. The factors are whether the potential joint employer:

  • 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.

The rule explains that the potential joint employer must actually exercise, directly or indirectly, one or more of the elements of control listed above to be liable under the FLSA. That means that a potential joint employer’s ability or reserved right to exercise some control over the employee, without some actual exercise of control, is likely not, by itself, enough to establish joint employer status under the FLSA. The weight of the factors may vary from case to case and no single factor is determinative. Additional factors may be relevant but only to the extent they relate to the exercise of significant control over the terms and conditions of the employee’s work.

The rule also identifies certain factors and arrangements that do not make joint-employer status more or less likely, including whether:

  • The employee is economically dependent on the potential joint employer;
  • The employer is operating as a franchisor or using a similar business model;  
  • The potential joint employer’s contractual agreements with the employer requiring the employer to comply with certain legal obligations, meet health or safety standards, or ensure consistent quality of work product;
  • And others.

What California Employers Should Know

While employers subject to the FLSA will likely welcome the DOL’s final rule, California employers should remember that the state has its own set of joint-employer rules that are generally broader and more protective of workers than the federal law. The Industrial Welfare Commission and the California Supreme Court adopted a broad joint-employer definition that not only focuses on the employer’s exercise of control over wages, hours and working conditions, but also encompasses situations in which the potential joint employer knows of and fails to prevent work from occurring.

Additionally, while the right of control is often a key test in determining joint-employer liability, specific California statutes impose strict joint-employer liability on businesses using staffing agencies or other labor contractors, regardless of who exercises control. California Labor Code section 2810.3 holds companies accountable for wage and hour violations when they use staffing agencies, or other labor contractors, to supply workers.

For workers supplied by labor contractors, California companies can also be held legally accountable for failing to pay wages and secure valid workers’ compensation coverage as well as violation of specified whistleblower protections.

California employers should consult with legal counsel for ways to minimize the risk of joint-employer liability, and should also use caution when engaging staffing agencies and labor contractors, including obtaining assurances of their employment law compliance.

Don’t forget the other recent major update to FLSA regulations — the “regular rate” rule went into effect on January 15, 2020.

James W. Ward, Employment Law Subject Matter Expert/Legal Writer and Editor 

CalChamber members can read more about Joint-Employer Liability on Non-Direct Hires in the HR Library. Not a member? See what CalChamber can do for you.  

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