The Second Circuit's New 6-Factor Test for Analyzing Joint Employer Liability Under the FLSA and Its Potential Impact on Legitimate Outsourcing Agreements

By Carla R. Walworth and Neil B. Stekloff

Introduction

In Zheng v. Liberty Apparel Co., 2003 WL 23028312 (2d Cir. Dec. 30, 2003), the Second Circuit Court of Appeals created a new six factor test for assessing when businesses are liable as "joint employers" for Fair Labor Standards Act ("FLSA") violations committed by their subcontractors. Zheng is particularly noteworthy in that the Court expressly recognized that literal application of its newly-formulated, six factor test might suggest joint employer liability under many legitimate outsourcing and subcontracting relationships. Although the Zheng Court went out of its way to say that this was not its intention, and that "normal" outsourcing agreements would not give rise to joint employer liability under the FLSA, its new test seemingly opens the door wide for aggrieved employees to argue that any legitimate outsourcing relationship is a "mere subterfuge" to avoid FLSA obligations and, therefore, creates joint employer liability.

Relevant Background

The Zheng Plaintiffs were 26 garment factory workers, responsible for sewing labels and buttons, and for cuffing, hemming, and hanging the garments. They were directly employed by six contractors (the "Contractors") who, in turn, were hired by Defendant Liberty Apparel ("Liberty") to physically assemble the garments after Liberty designed the garments and cut the fabric to customer specifications.

Plaintiffs brought suit against both the Contractors and Liberty, alleging they were not paid either minimum wage or overtime, as required by the FLSA and New York Labor Law (the "NYLL"). By the time Plaintiffs sued, however, the Contractors were nowhere to be found - making the central issue in the case whether Liberty could be considered Plaintiffs' joint employer.

Liberty did not hire or fire the Zheng Plaintiffs, nor did Liberty determine their rate or method of payment. That was done by the Contractors, who also set Plaintiffs' work schedules. Liberty monitored assembly of their garments by visiting the Contractors' factory and performing "quality control" with respect to the finished garments - although the parties disputed the nature and extent of that monitoring. The parties also disputed how much of Plaintiffs' work was actually done for Liberty. Plaintiffs asserted that 70-75% of their assembly work was done for Liberty, whereas Liberty claimed that the Contractors were only responsible for approximately 10-15% of Liberty's assembly jobs.

Applying a four-factor test first articulated by the Second Circuit in 1984 in Carter v. Dutchess Community College, 735 F.2d 8 (2d Cir. 1984), and reaffirmed as recently as 1999 in Herman v. RSR Security Serv., 172 F.3d 132 (2d Cir. 1999), the District Court entered summary judgment for Liberty on the grounds that Liberty could not be considered Plaintiffs' "employer" under the FLSA given that Liberty could not and did not: (1) hire and fire Plaintiffs; (2) supervise and control Plaintiffs' work schedules; (3) determine Plaintiffs' rate and method of pay; and (4) maintain employment records with respect to Plaintiffs. The District Court thereafter declined to exercise supplemental jurisdiction over Plaintiffs' NYLL claims, dismissing all claims against Liberty.

The Second Circuit's New "Joint Employer" Analysis

The Second Circuit reversed the summary judgment for Liberty and remanded for consideration of a new set of factors. It held that the District Court erred in relying...