Damage Control: How Recent Changes to the FLSA and NLRA May Affect Your Status as a Joint Employer

In January 2020, the United States Department of Labor (USDL) announced a final ruling which updates the interpretation of “joint employer” status under the Fair Labor Standards Act (FLSA) effective March 16, 2020. For over 60 years, there had been no meaningful updates regarding joint employer status, leaving many franchisors and similarly situated parties wondering – is my entity liable as a joint employer for my franchisee’s/affiliate’s acts relating to employees? Finally, the USDL has helped shed some light on this issue.

Similarly, the National Labor Relations Board (NLRB) recently announced its final ruling that will amend the National Labor Relations Act (NLRA) – primarily, the definitions of “joint employer” and other key terms, and clarification of what constitutes exercising “direct and immediate control” (effective April 27, 2020).

How does 'joint employer' status come into play?

Many employees who file claims against their employer for FLSA or NLRA violations attempt to also file claims against their employer’s “joint employer” (i.e. a franchisor, affiliate, parent company, etc.). One reason?  Deeper pockets. However, joint employer status essentially comes down to one’s control over an employer’s employee. The USDL’s ruling as well as the NLRB’s ruling addressed this issue and how one may be held liable to an employee as a joint employer.

What did the USDL change?

The USDL’s ruling specified that when an employee performs work for an employer that benefits another person/entity (franchisors, affiliates, parent company)(a “Benefited Party”), the Benefited Party may be liable as a joint employer when said employee acts directly or indirectly in the interest of the Benefited Party, in relation to the employee and his/her work conditions. Whether one acts “directly or indirectly” can be determined by a four factor balancing test – the main change to the FLSA implemented by the USDL – which relate to the control of one over the employer’s employee by the Benefited Party:

  1. Hiring/firing employee
  2. Supervision/control over the employee’s work and schedule
  3. Determination of employee’s rate and method of payment
  4. Maintaining employee’s employment records

Other factors may be considered, but only if it relates to the significant control over the employee by the Benefited Party.

So am I a joint employer?

It still depends, but the USDL provided much needed guidance and certain examples to show whether one would qualify as a joint employer to be held liable in an employee lawsuit.  The USDL noted that one factor alone is not dispositive in determining joint employer status. 

  1. Hiring/firing employee: Obviously, a Benefited Party directly hiring/firing an employer’s employee tends to show a joint employer’s control.  However, the USDL noted that a mere request from a Benefited Party to an employer to hire/fire an employee is not enough to amount to the level of authority/control required to find joint employer status. A mere request to hire/fire suggests the employer could voluntarily hire/fire the employee, but was not required by the Benefited Party to do so. Repeated requests and pressure by a Benefited Party to an employer to hire/fire an employee, tends to show authority/control over said employee.
  2. Supervision/control over work/work schedules: This factor depends on the level and limitations of supervision. Minimal supervision – such as a franchisor providing a franchisee general instructions relating to day-to-day operations or tasks to complete – would not amount to the level of supervision/control required for a finding of joint employer status. Though, hands-on instruction on a regular and routine basis, directly assigning employees to perform specific tasks, implementing the work schedule of employees, and closely supervising the employees’ work tends to weigh in favor of joint employer status. A franchisor merely providing samples/form documents to franchisees to use (operational plans, business plans, marketing materials) does not suggest control – it’s merely a guidance or recommendation that the franchisee may or may not choose to use. Also, the USDL has stated that requiring a certain uniform, alone, does not demonstrate substantial control, nor does requiring employees to abide by a code of conduct implemented by a Benefited Party.
  3. Determination of rate and method of payment: Providing a wage floor for franchisees (i.e. minimum rate of pay) to pay its employees is not enough to suggest control over the pay rate of employees. This is merely a guidance/recommendation that franchisee should pay no less than x-amount.  However, determining the exact pay rate of employees, how they will be paid, and restricting employees from working a certain amount of hours suggests control. Essentially, franchisors may provide their franchisees guidance or suggestions on what to pay, but should be cautious in exerting authority or control over what the franchisee ultimately decides. Otherwise, a franchisor could be found liable as a joint employer.
  4. Maintaining records of employment:The USDL specifically noted that this factor alone will not result in a finding of joint employer status. It is common practice of franchisors to maintain all business records of its franchisees, including employment records.  Merely holding copies of records does not weigh in favor of joint employer status. However, a Benefited Party tracking hours worked of employees, performing its own background checks, or showing any control over the employment records could suggest control requisite control indicating a joint employer status.

What did the NLRB change?

The NLRB’s recent final ruling will provide clear guidance in determining joint employer status, clearly defines what a joint employer is, and what constitutes one’s “direct and immediate control” over another employer’s employee. 

Key Changes to the NLRA

Definitions: key terms are now defined by the NLRB
  • “Joint Employer”: A business must possess and exercise substantial direct and immediate control over one or more essential terms and conditions of employment of another employer’s employee.
    • An “employer” as defined in Section 2(2) of the NLRA may be considered a “joint employer” if the two employers share or codetermine employees’ essential terms and conditions of employment.
  • “Essential terms and conditions of employment”: Wages, benefits, hours of work, hiring, discharge, discipline, supervision, and direction.
  • “Substantial direct and immediate control”: Direct and immediate control that has a regular and continuous effect on an essential term or condition of employment of another employer’s employees.
  • Such control is not “substantial” if only exercised on a sporadic, isolated or minimal basis.

When an entity does exercise direct and immediate control:

  • Over wages: Actually determines wage rates/salary
  • Over benefits: Actually determines fringe benefits to be provided/offered
    • i.e. selecting health insurance plans and pension plans.
  • Over hours of work: Actually determines work schedules or work hours, including overtime.
  • Over hiring: Actually determines which particular employees will be hired and which will not.
  • Over discharge: Actually decides to terminate employment.
  • Over discipline: Actually decides to suspend or otherwise discipline.
  • Over supervision: Actually instructs employees how to perform their work or by actually issuing employee performance appraisals.
  • Over direction: Assigning particular employees their individual work schedules, positions, and tasks.

When an entity does not exercise direct and immediate control:

  • Over wages: By entering into a cost-plus contract (with or without a maximum reimbursable wage rate).
  • Over benefits: By permitting another employer, under an arms-length contract, to participate in its benefits plans.
  • Over hours of work: Establishing an enterprise’s operating hours or when it needs services provided by another employer.
    • Specifying hours for a lunchroom to be open does not suggest direct and immediate control, nor indirect control.
  • Over hiring: Where one requests changes in staffing levels to accomplish tasks or by setting minimal hiring standards such as those required by government regulations.
  • Over discharge: By bringing misconduct or poor performance to the attention of another employer that makes the actual discharge decision; by expressing a negative opinion of another employer’s employee; by refusing to allow another employer’s employee to continue performing work under a contract or by setting minimal standards of performance or conduct, such as those required by government regulation.
  • Over discipline: Same as discharge, and where it refuses to allow another employer’s employee to access its premises or to continue performing work under a contract.
  • Over supervision: When its instructions are limited and routine, and consist primarily of telling another employer’s employees what work to perform, or where and when to perform the work, but not how to perform it.
  • Over direction: By setting schedules for completion of a project, or by describing the work to be accomplished on a project.

In summary, one’s status as a joint employer essentially comes down to their control over an employer’s employees. Keep in mind, under both the FLSA and NLRA, the determination of joint employer status will be a case-by-case basis. The more control shown, the more likely one will be liable as a joint employer. Even if control is unintended, joint employer status may be found.