The issue of joint employers has been a big concern for franchisors and franchisees in light of recent NLRB rulings.  Now entering into the fray, the U.S. Department of Labor has recently issued Administrator’s Interpretation No. 2016-1 addressing joint employment under the Fair Labor Standards Act and Migrant and Seasonal Agricultural Worker Protection Act.

The Administrator’s Interpretation was issued in response to what the Wage and Hour Division saw as an increase in non-traditional employer relationships where more than one employer controls the work of the employee.  The guidance focuses on two types of joint employment relationship — horizontal and vertical.  Horizontal joint employment relationships are those where the employee has relationships with two or more employers and the employers are sufficiently associated or related with respect to the employee such that they jointly employ the employee. Vertical joint employment exists where an employee has a relationship with one employer such as a staffing agency or subcontractor and the economic realities show that he or she is economically dependent on another entity involved in the work.

19167432_sAll cleared up, right?  Don’t worry if you have no idea what that means.  The definition is clear as mud.

In the franchise setting, horizontal joint employment may arise where an employee works for one franchisee at one location and also for another franchisee at another location where there are common owners or management.  For example, A1 Corp. is a franchisee of The Sub Shop.  A2 Corp. is also a franchisee of The Sub Shop at a different location.  A1 is owned by the Smith family.  A2 is also owned by the Smith family with the James family owning a 1% interest.  Employees of A1 Corp. are frequently loaned to A2 Corp. as that location is just opening and staffing is not complete.  A1 and A2 may be horizontal joint employers.

The concept of vertical joint employment may be used in situations where an employee is arguing that the franchisor is a joint employer with the franchisee.  The Interpretation reiterates that the FLSA should be interpreted to broaden the definition of a joint employer.

In order to determine if a vertical joint employment relationship exists, the DOL will apply the economic realities test.  The economic realities test for joint employment is similar to the DOL’s test for employee misclassification.  The factors that will be considered to determine if a vertical joint employment relationship exists are:

  • The extent to which the work performed by the employee is controlled or supervised by the potential joint employer to the point that it suggests the the employee is economically dependent on the potential joint employer;
  • The extent to which the potential joint employer has the power to hire or fire the employee, modify employment conditions, or determine the rate or method of pay;
  • Permanency or duration of the relationship;
  • If the employee’s work for the potential joint employer is repetitive or rote, is relatively unskilled or requires little or no training, then that suggests the employee is economically dependent on the potential joint employer;
  • Whether the employee’s work is integral to the potential joint employer’s business;
  • Whether the work is performed on the premises owned or controlled by the potential joint employer; and
  • Whether the potential joint employer handles administrative functions such as payroll, providing workers’ compensation insurance, etc.

Why does this matter?  The biggest issue is how overtime is calculated.  If an employer is deemed to be a joint employer for FLSA purposes, then the employee’s hours that are worked for all joint employers are aggregated for purposes of determining how many hours were worked in a work week and whether overtime is owed.  For example, if an employee works 20 hours for one employer and 25 hours for the other joint employer, then the employee is entitled to 5 hours of overtime pay.

This is a whole new frontier and likely the subject of significant enforcement efforts by the DOL.  Franchisors and franchisees are encouraged to discuss concerns with legal counsel.