DOL proposes new rule covering 'vertical' and 'horizontal' joint employer relationships

The U.S. Department of Labor (DOL) recently proposed a rule that would create a uniform standard for determining joint employer status under the Fair Labor Standards Act (FLSA), the Family and Medical Leave Act (FMLA), and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA).

The proposed rule has significant implications for employers who share workers or rely on contractors, because a joint-employment finding may create joint and several liability for wage-and-hour violations, leave obligations, and other statutory compliance issues under the FLSA, FMLA, and MSPA. For example, an entity that is found to be a joint employer may be liable for the other joint employer's failure to pay overtime or minimum wage under the FLSA or failure to comply with the FMLA leave requirements for joint employees.

The agency has said the proposed rule is intended to "reduce compliance and litigation costs, improve the department's ability to enforce the law, and help workers to better understand their rights and available remedies" while also promoting "greater uniformity in the analysis applied by courts." 

The proposed rule addresses two types of relationships. A "vertical" joint-employment relationship exists where a worker is jointly employed by two or more employers that simultaneously benefit from the same work. A "horizontal" joint-employment relationship exists where a worker works separate hours for two or more employers "that are sufficiently associated with each other with respect to the employment" of the worker.

For determining vertical joint employment, the proposed rule focuses on whether the potential joint employer: (1) can hire or fire the employee; (2) substantially supervises or controls work schedules or conditions of employment; (3) determines the rate and method of pay; and (4) maintains employment records. No single factor is dispositive, and the proposed rule allows for consideration of additional relevant factors, including the employee's economic dependence on the employer for work or whether the employee works at a location or facility owned or controlled by the potential joint employer. 

For horizontal joint employment, employers may be considered "sufficiently associated" if: (1) they have an arrangement to share an employee's services; (2) one employer acts directly or indirectly in the interest of the other in relation to the employee; or (3) they share control of the employee because one controls, is controlled by, or is under common control with the other. Though the proposed rule does not state explicitly whether any of these factors is dispositive, it states that a determination of horizontal joint employment "depends on all of the facts and circumstances."

The proposed rule also states that a potential joint employer's ability, power, or reserved right to act is relevant, but the actual exercise of control is more important than a merely reserved right of control. The proposed rule states further that some ordinary business relationships between employers "that have little to do with their employment of specific workers," standing alone, will not automatically create joint-employment status. 

For example, the proposed rule states that "sharing a vendor or being franchisees of the same franchisor, are not generally probative, and could not alone indicate a sufficient association between the employers to establish that they are joint employers." The proposed rule provides further that common practices such as requiring contractual compliance with legal or quality control obligations, providing sample or form handbooks or policies, offering benefit plans, or maintaining franchise brand standards do not, on their own, establish a joint employer relationship.

Key takeaways for employers

The proposed rule is currently in a 60-day notice-and-comment period, with comments due by June 22. For employers, now is the time to review workforce arrangements to address proactively any potential compliance issues. Even with the proposed rule's carveouts, employers should not rely on labels alone. Employers should assess contracts with staffing agencies, subcontractors, franchisees, and other third parties to determine what rights of control they retain, what level of control they actually exercise in the relationship, and whether those rights are truly necessary. Employers should also consider whether recordkeeping practices (e.g., for timekeeping and other employment records) are accurate and accessible if a joint-employment relationship is later found.

Businesses that rely on a shared workforce also may want to consider submitting comments to the DOL before the June 22 deadline, particularly if the proposed rule would materially affect their operations. Because the proposed rule could change before taking effect--or face legal challenges after finalization--employers should continue monitoring developments while using the proposed rule as a roadmap for assessing existing workforce arrangements now.

Finally, employers should consider that the proposed rule is intended as interpretive guidance for DOL enforcement. Even if the proposed rule is finalized, it would not automatically bind courts, which may continue applying varying tests depending on the jurisdiction. That is especially important because some states may apply broader joint-employer standards than the proposed rule. Employers therefore should evaluate both federal and state-law exposure when reviewing workforce arrangements.