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Final rule creates new test for joint employment


Author: ADP Admin/Monday, February 3, 2020/Categories: Compliance Corner

On Jan. 12, 2020, the Department of Labor (DOL) released a final rule that will create a new test for determining whether a joint-employer relationship exists in certain situations under the Fair Labor Standards Act (FLSA). The final rule takes effect March 16, 2020.


Among other things, the FLSA requires employers to pay non-exempt employees at least the minimum wage for each hour worked and overtime when they work more than 40 hours in a workweek. Under the FLSA, more than one employer may be responsible for FLSA violations when a joint-employer relationship exists.

There are generally two different types of joint employment:

Scenario 1:

The employee has an employer who employs them to work, but another entity simultaneously benefits from that work. For example, the employer could be a subcontractor, and the potential joint employer is the general contractor. Or a joint employer relationship might exist where a business uses a contractor for cleaning services.

Scenario 2:

One employer employs an employee for one set of hours in a workweek, and another employer employs the same employee for a separate set of hours in the same workweek, but the jobs and the hours worked for each employer are separate.

The final rule primarily addresses Scenario 1.

Final Rule:

Under the final rule, joint employment exists in Scenario 1 where the other entity is acting directly or indirectly in the interest of the employer in relation to the employee. To apply this standard, the final rule establishes a four-part test that will look at whether the potential joint employer:

·       Hires or fires the employee;

·       Supervises and controls the employee's work schedules or conditions of employment to a substantial degree;

·       Determines the employee's rate and method of payment; and

·       Maintains the employee's employment records.

Under this test, no single factor alone will determine joint-employer status, and not all of the factors need to be satisfied for joint employment to exist. Instead, all the facts of a case must be examined, and the weight of each factor will vary depending on the circumstances.

The final rule notes that additional factors may also be relevant, but only when they show whether the potential joint employer is exercising significant control over the terms and conditions of the employee's work. In a departure from the proposed rule, the final rule recognizes that the reserved right to act can play some role in determining joint-employer status, but only if there is some actual exercise of control. For example, if a potential joint employer sets the wage rate for an employee and sets their weekly work schedule, and there was also evidence that this entity has authority to fire the employee at any time, then this reserved power would be relevant to the analysis and could be considered.

Direct or Indirect Control:

As mentioned above, joint employment exists where the other entity is acting directly or indirectly in the interest of the employer in relation to the employee. A potential joint employer may exercise direct control by, for instance, hiring or firing an employee; setting an employee's schedule; or determining an employee's pay. By contrast, the potential joint employer may exercise indirect control by giving "mandatory directions" to the intermediary employer to take such actions.


The final rule includes several examples to illustrate how to apply the four-part test, one of which is provided below:

A restaurant contracts with a cleaning company to provide cleaning services. The contract doesn't give the restaurant authority to hire or fire the cleaning company's employees or to supervise their work on the restaurant's premises. However, in practice, a restaurant official oversees the work of employees of the cleaning company by assigning them specific tasks throughout each day, providing them with hands-on instructions, and keeping records tracking the work hours of each employee. On several occasions, the restaurant requested that the cleaning company hire or terminate individual workers, and the cleaning company agreed without question each time.

In the final rule, the DOL says that under these facts, the restaurant is a joint employer of the cleaning company's employees because the restaurant exercises sufficient control, both direct and indirect, over the terms and conditions of the employment. The restaurant directly supervises the cleaning company's employees' work on a regular basis and keeps employment records. And the cleaning company's repeated and unquestioned submission to the restaurant's hiring and firing requests indicates that the restaurant exercised indirect control over their hiring and firing decisions.

Factors that Don't Make Joint Employer Status More or Less Likely:

The final rule also identifies certain business models, business practices, and contractual agreements that don't make joint-employer status either more or less likely, including:

·       Operating as a franchisor or entering into a brand and supply agreement, or using a similar business model;

·       The potential joint employer's contractual agreements with the employer requiring the employer to comply with its legal obligations;

·       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; and

·       The potential joint employer's practice of providing the employer with a sample employee handbook, or other forms, allowing the employer to operate a business on its premises (including "store within a store" arrangements); offering an association health or retirement plan to the employer or participating in such a plan with the employer; jointly participating in an apprenticeship program with the employer; or any other similar business practice.

Compliance Recommendations:

Employers should work with legal counsel to determine the impact of the final rule on their business. Keep in mind that the final rule only applies to certain situations under the FLSA. There are different tests used for other federal laws and many states have their own tests for joint employment. Please contact your dedicated service professional with any questions.