Federal court expands definition of “joint employment” for wage and hour compliance purposes.

The U.S. Court of Appeals for the Fourth Circuit, which makes decisions that are binding on federal courts in Maryland, issued a ruling on January 25, 2017, that will have a significant impact on industries where subcontractors provide labor on projects.

The Fair Labor Standards Act (FLSA) establishes a federal minimum wage and requires employers to pay “time and a half” overtime to employees that work more than forty hours in a single workweek. The Department of Labor has long maintained regulations recognizing that it is possible for a single worker to serve in the role of an employee to two or more employers at the same time, for purposes of the FLSA. The regulations make a distinction between “separate and distinct employment” of a worker and “joint employment” of a worker by two companies. An employment relationship is “separate and distinct” when two employers act entirely independently of each other and are completely disassociated from each other with respect to a worker’s employment. Joint employers, on the other hand, are responsible (individually and jointly) for compliance with overtime laws and regulations. The hours that an employee works for each of two joint employers in a single workweek must be aggregated to determine whether, and to what extent, the worker is to be paid overtime. When there is “joint employment,” a worker’s employment by the joint employers is treated as “one employment” for purposes of determining compliance with wage and hour requirements, and the joint employers are held jointly and severally liable for violations.

In the case that was recently reviewed by the Fourth Circuit, several workers were employed by a small subcontractor as framing and drywall installers, and that subcontractor did almost all of its work for a single general contractor. While the subcontractor was responsible for hiring and firing, on a few occasions workers received paychecks directly from the general contractor. The general contractor played a role in determining the workers’ daily and weekly schedules, and the general contractor regularly communicated its site staffing needs to the subcontractor. The workers wore hardhats and vests bearing the general contractor’s name and logo and were required to sign in on timesheets provided by the general contractor. The general contractor’s foremen continually supervised the workers and owned nearly all the tools and materials used by the workers.

Applying a previously-applicable legal test to determine whether these facts constituted “joint employment,” the trial court ruled that it did not. On appeal, however, the Fourth Circuit has now established a broader test than was applied by the trial court. Going forward, federal courts in the Fourth Circuit (including the federal courts in Maryland) will consider six factors in determining whether two or more employers are “not completely disassociated” with respect to a worker, for purposes of determining joint employment:

1. Whether, formally or as a matter of practice, the putative joint employers jointly determine, share, or allocate the power to direct, control, or supervise the worker, whether by direct or indirect means;
2. Whether, formally or as a matter of practice, the putative joint employers jointly determine, share, or allocate the power to – directly or indirectly – hire or fire the worker or modify the terms or conditions of the worker’s employment;
3. The degree of permanency and duration of the relationship between the putative joint employers;
4. Whether, through shared management or a direct or indirect ownership interest, one putative joint employer controls, is controlled by, or is under common control with the other putative joint employer;
5. Whether the work is performed on premises owned or controlled by one or more of the putative joint employers, independently or in connection with another; and
6. Whether, formally or as a matter of practice, the putative joint employers jointly determine, share or allocate responsibility over functions ordinarily carried out by an employer, such as handling payroll, providing workers’ compensation insurance, paying payroll taxes, or providing the facilities, equipment, tools, or materials necessary to complete the work.

These six factors are not an exhaustive list of all potentially relevant considerations for a court to review. Ultimately, the determination of “joint employment” will be based upon the circumstances of the entire activity. The appeals court expressly held that the fact that there is a legitimate contractor-subcontractor relationship between the putative joint employers is not relevant, nor is liability predicated on any bad faith by the two companies in seeking to avoid compliance with wage and hour laws.

This broader standard is likely to expose many companies to joint liability for payment of minimum wages to the employees of their subcontractors. Companies that retain subcontractors would be well-advised to closely examine particulars of their relationships with employees of subcontractors, to avoid the consequences of being found to be the “joint employer” of employees for purposes of complying with the FLSA.