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May 02, 2017 in HR, Compliance

Joint Employers & Overtime Pay | Human Resources Services

If your company is classified as a joint employer with one or more other companies, you may be liable for overtime pay even if you carefully avoid workweeks that exceed 40 hours of work. Why? Because the Department of Labor’s Wage and Hour Division (WHD) states that you and your fellow joint employers share responsibility for compliance with the Fair Labor Standards Act (FLSA).

The WHD fleshed out the details in a recent opinion letter (Administrator’s Interpretation, No. 2016-1). According to this letter, a contract such as an agreement between you and a staffing company doesn’t necessarily determine who the employer actually is. You can contractually delegate a lot of responsibility to a staffing company, including supervision, and still be considered joint employers. That determination, says the WHD, is based on “the economic realities of the working relationship.”

That expansive definition contrasts with common law concepts of employment and joint employment, which look at the amount of control an employer exercises over an employee.

Broad Definitions

According to the FLSA, an employer includes “any person acting directly or indirectly in the interest of an employer in relation to an employee.” And the word “employ” is defined simply as “to allow or permit to work.”

There are two categories of joint employment: horizontal and vertical. The WHD states that a horizontal joint employment relationship exists “when an employee is employed by two or more technically separate but related or overlapping employers.”

An illustration offered by the WHD is a registered nurse who works at one nursing home for 25 hours a week, and another one for 25 hours a week. If the two nursing homes are deemed to be joint employers, she would be entitled to 10 hours of overtime pay since the two 25-hour stints total 50 hours, or 10 hours over the standard 40-hour workweek.

Gauging Economic Reality

Continuing with the example of the nursing homes, the following questions can get at the economic reality of the situation to determine whether the two facilities are joint employers.

  • Does one employer own all or part of the other employer, or do they have any common owners?
  • Do the two have any overlapping officers, directors, executives or managers?
  • Do they share control over operations; for example, hiring, firing, payroll, advertising or overhead costs?
  • Does one employer supervise the work of the other?
  • Do they treat employees as a pool of employees available to both of them?

Do they share any clients or customers?

The WHD opinion letter adds that it’s not necessary for all or even most of the above factors to be present to indicate joint employment.

Vertical Joint Employers

In a vertical joint employment relationship, there are two layers of employers: 1) The ultimate employer, and 2) An intermediate layer employer, such as a staffing agency. According to the WHD, “There is typically an established or admitted employment relationship between the employee and the intermediary employer. That employee’s work, however, is typically also for the benefit of the other employer.”

Here are some examples of cases in which courts concluded there was a vertical joint employer relationship:

  • Garment workers directly employed by an employer who contracted with the garment manufacturer to perform a specific function,
  • Nurses placed at a hospital by a staffing agency, and
  • Warehouse workers whose labor is arranged and overseen by layers of intermediaries between the workers and the owner or operator of the facility.

The situation is clear-cut when the supplier of the labor is actually an employee or economically dependent on the higher level employer. For example, “If a drywall subcontractor is not actually an independent contractor but is an employee of the higher-tier contractor,” says the WHD, “then all of the drywall contractor’s workers are also employees of the higher-tier subcontractor.”

Here are some key factors that the agency would weigh in determining whether a vertical joint employer relationship existed:

  • To what degree is the work performed by the employee directed, controlled or supervised by the potential higher-level employer, beyond a “reasonable level of contract oversight?”
  • What is the permanency and duration of the relationship? If the employee’s arrangement with the higher-level employer is “indefinite, permanent, or long-term,” that would suggest joint employment status.
  • If the employee’s work is an integral part of the higher-level potential joint employer’s business, that suggests a degree of economic dependence indicative of a joint employer relationship.
  • Where is the work performed? If it’s on the premises owned by the higher-level potential joint employer, that provides more evidence of a joint employer relationship.
  • The more common administrative functions provided by a possible joint employer (payroll, for example), the greater the probability that employees are dependent on the existence of a joint employer relationship. The same is true when facilities, safety equipment, housing or transportation are provided.

It must be noted that federal courts have greater authority than the Department of Labor in interpreting laws such as the FLSA. Indeed, the WHD’s opinion letter supports its positions by referencing federal court rulings — and even points out examples where courts have rendered conflicting opinions.

Still, going up against a federal agency by asking a court to overrule the agency is not generally advisable. Therefore, if you think you might be deemed a joint employer, be sure to pay close attention to the number of hours the potential employees are working to steer clear of unexpected overtime pay obligations, or any other requirements of the FLSA.