DOL Issues Interpretation To Expand Joint-Employer Liability

The position could expose more putative employers to potential liability under the Fair Labor Standards Act.

In an Administrator's Interpretation (AI) issued on January 20, the US Department of Labor's (DOL's) Wage and Hour Division has again sought to expand employers' potential liability under the Fair Labor Standards Act (FLSA). Following its July 2015 AI, which sought to limit who can be an independent contractor and thus create more employee-employer relationships, the DOL now seeks to significantly expand the circumstances under which companies can be joint employers. Specifically, even in situations where little or no traditional indicia of control can be shown to exist between two entities, the DOL would require an analysis of the "economic reality" of the situation using factors created decades ago in the context of farm laborers. The DOL does not explain how many of those factors are relevant to a joint-employer inquiry in the 21st century economy. However, its current position could expose more putative employers to potential liability under the FLSA, even if they exercise little to no actual or functional control.1

This approach is a significant departure from the tests that courts traditionally used in many jurisdictions and further signals the DOL's ongoing efforts to hold large companies responsible for functions and decisions they thought they had properly outsourced. With courts' reaction to the AI uncertain, companies should be on alert to this new potential joint-employer liability.

Traditional Basis for Joint-Employer Liability

The US Supreme Court's decision in Rutherford Food Corp. v. McComb2 provides the foundation for contemporary "joint-employer" jurisprudence. Although the Court in Rutherford did not directly address the joint-employer relationship, it made clear that the determination of whether an employer-employee relationship exists does not depend on "isolated factors but rather upon the circumstances of the whole activity."3 Building on this concept, circuit courts of appeal have subsequently fashioned their own multifactor tests for determining whether a company could be held liable as a joint employer under the FLSA.

One of the first such cases was Bonnette v. California Health and Welfare Agency.4 In that case, the US Court of Appeals for the Ninth Circuit established the following test to determine whether a state welfare agency was the joint employer of in-home caregivers: "whether the alleged employer (1) had the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records."5 Applying these factors, the court held that the agency was an "employer" under the FLSA because it "exercised considerable control over the nature and structure of the employment relationship."6 The Ninth Circuit and several of its sister circuits have since added additional factors to the Bonnette test to account for the so-called "indirect" control that putative employers may exercise over workers.

Although courts continue to apply varying factors, including...