On April 1, 2019, the U.S. Department of Labor (DOL) published a proposed rule that affects the definition of joint employer status, commonly understood as a situation where an employee is employed by multiple organizations that have some relationship in the management of the employee. The definition of joint employer status today is generally based upon:

• Whether the two companies employ the same individual
• Whether each employer is associated with the other
• To what extent each employer has the right to control or exercise control over the work of the employee

This definition has allowed for fewer employees to be considered subject to joint employer status.

Proposed Changes

The DOL proposed rule is meant to clarify previous guidance and likely has the effect of causing more employees to be considered as jointly employed. The new proposal establishes “a clear, four-factor test—based on well-established precedent—that would consider whether the potential joint employer actually exercises the power to:

• hire or fire the employee;
• supervise and control the employee’s work schedules or conditions of employment;
• determine the employee’s rate and method of payment; and
• maintain the employee’s employment records.”

The proposed rule allows that in some situations where only one of the determining factors applies, justification for determining that joint employment does exist. A couple examples from a published DOL fact sheet of how this new rule would apply are as follows:

(1) Example: An individual works 30 hours per week as a cook at one restaurant establishment, and 15 hours per week as a cook at a different restaurant establishment affiliated with the same nationwide franchise. These establishments are locally owned and managed by different franchisees that do not coordinate in any way with respect to the employee. Are they joint employers of the cook?

Application: Under these facts, the restaurant establishments are not joint employers of the cook because they are not associated in any meaningful way with respect to the cook’s employment. The similarity of the cook’s work at each restaurant, and the fact that both restaurants are part of the same nationwide franchise, are not relevant to the joint employer analysis because those facts have no bearing on the question whether the restaurants are acting directly or indirectly in each other’s interest in relation to the cook.

(2) Example: An individual works 30 hours per week as a cook at one restaurant establishment, and 15 hours per week as a cook at a different restaurant establishment owned by the same person. Each week, the restaurants coordinate and set the cook’s schedule of hours at each location, and the cook works interchangeably at both restaurants. The restaurants decided together to pay the cook the same hourly rate. Are they joint employers of the cook?

Application: Under these facts, the restaurant establishments are joint employers of the cook because they share common ownership, coordinate the cook’s schedule of hours at the restaurants, and jointly decide the cook’s terms and conditions of employment, such as the pay rate. Because the restaurants are sufficiently associated with respect to the cook’s employment, they must aggregate the cook’s hours worked across the two restaurants for purposes of complying with the Act.

The second example would require overtime payments to be incurred to the employee even if these restaurants are separate EIN’s. Most payroll software systems would struggle to comply with this new proposed rule if separate EIN’s are used for the different restaurants.

What People Are Saying

The impact of this rule has led to concerns by many in the payroll industry that it would encourage “fissuring”, understood as the practice of using temp labor through a staffing company in lieu of W-2 employees overall having a negative effect on the workforce. An article by the Economic Policy Institute details this issue further. That being said, the staffing industry has their own concerns about the proposed definition of Joint Employer Status. It’s conceivable that a staffing company may be held responsible for FLSA violations by their client. Read more here.

As your partner in HR/Payroll compliance, Integrity Data will continue to monitor this proposal along with other issues that affect the payroll industry. Keep an eye on our blog for more information.

Written by Tom Franz - Client Engagement Director, Integrity Data