Fourth Circuit Offers New Test for Joint Employment under FLSA

The Fourth Circuit recently ruled that a general contractor was the joint employer of employees of its subcontractor for purposes of the Fair Labor Standards Act.  Salinas v. Commercial Interiors, Inc. has broad implications for the wage and overtime responsibilities of employers located within the Fourth Circuit, which has jurisdiction over appeals from federal courts located in Maryland, Virginia, North Carolina, South Carolina, and West Virginia.

The Fourth Circuit Rejects Other Joint Employer Tests and Fashions a New One

The Fourth Circuit rejected the array of multi-factor joint employer tests that other courts have deployed (i.e., the six-factor “economic reality” test and the eight-factor “economic dependence test”), because according to the court, they all focus on the wrong relationship: the relationship between the employer and the individual, instead of the relationship between the two employers.  As the court pointed out, the fact that an individual may be employed by an employer does not necessarily answer the question of whether a joint employment relationship exists between two employers.

The Fourth Circuit Sets Forth a New Joint Employment Standard Using a Six-Part Text

In focusing on the relationship between the two employers, the court referenced the Department of Labor’s regulations, which distinguishes “separate” employment – when two persons or entities are “entirely independent” with respect to a worker’s employment—and “joint” employment—when two persons or entities are “not completely disassociated.”  This, the court said, meant that the employers “share, agree to allocate responsibility for, or otherwise codetermine—formally or informally, directly or indirectly—the essential terms and conditions of the worker’s employment” – the Fourth Circuit’s new joint employment standard

To determine whether any association exists, the Fourth Circuit, for the first time, set forth a list of six factors for lower courts to consider.  The six factors are:

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 a premises owned or controlled by one or more of the putative joint employers, independently or in connection with one 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.

The court noted that the list was non-exhaustive, and more importantly, joint employment may be found even if just one factor is satisfied, given the DOL regulations’ requirement that the two entities be completely disassociated and entirely independent.  At the same time, the court walked that pronouncement back just a little in a footnote by reiterating that the joint employment analysis is highly factual, and if the “satisfied” factor is supported by weak evidence, then it may not be enough by itself to find joint employment without more.  It gave an example of such “weak evidence” where a general contractor that sets the start and stop times for the workday at a jobsite and establishes site-wide safety protocols, without more, would not permit a joint employment finding.

In another case decided on the same day as Salinas, Hall v. DirectTV, the Fourth Circuit applied the test it announced in Salinas to find that satellite television installation technicians had alleged sufficient facts to support a finding that a joint employment relationship existed between satellite television company and the company that hired the technicians in order to withstand a motion to dismiss their complaint.  The Court’s application of the test can be found here.

Despite the Existence of Joint Employment, the Individual Must Still be “Employed” by at Least One of the Joint Employers

While two entities may be joint employers, they still have to “employ” the individual at issue before they can be held liable under the wage and hour laws.  This is where, the court said, the focus should go back to the relationship between the employer and the individual.  The Fourth Circuit confirmed that in this instance, it uses a separate six factor test to determine whether the individual was “economically dependent” on the employer such that they could probably be classified as an employee instead of an independent contractor of the joint employers.  The six factors are:

1. the degree of control that the putative employer has over the manner in which the work is performed;
2. the worker’s opportunities for profit or loss dependent on his managerial skill;
3. the worker’s investment in equipment or material, or his employment of other workers;
4. the degree of skill required for the work;
5. the permanence of the working relationship; and
6. the degree to which the services rendered are an integral part of the putative employer’s business.

Significantly, the court noted, as long as the individual is economically dependent on one of the joint employers, then by extension, he or she must be economically dependent on the other given the joint employment relationship.

Takeaways

1. The court’s decision was a victory for the U.S. Department of Labor because the court fashioned its new test consistent with the sub-regulatory guidance issued by the DOL in January 2016. It remains to be seen whether this issue will reach the Supreme Court and whether the DOL will change its position on the joint employer doctrine under the current administration.
2. Employers in the Fourth Circuit must understand that the new test set forth by the court in this decision increases their exposure to a wage and hour lawsuit. However, addressing the obvious concerns and questions a general contractor might have upon learning of this decision, the court noted that a general contractor hoping to avoid liability for FLSA violations should act to sufficiently disassociate itself from its subcontractor with regard to setting workers’ key terms and conditions of employment.  In other words, if you are a general contractor, you should explicitly make clear in policy and practice that you will not exercise dominion over the hiring, firing, wages, or other terms of the subcontractor’s employees.  Or, as the court suggested, if that’s not possible, the general contractor should think twice before contracting with a “fly-by-night operator … or one who plans to spurn the FLSA.”  Employers therefore, should thoroughly vet potential subcontractors and other service providers prior to entering into a formal relationship by which the subcontractor’s employees will have significant contact with or benefit the general contractor.
3. This case is significant because even if you are an employer that does not employ an individual in the traditional sense, if you are sufficiently associated with another employer who does employ that individual, you are responsible for complying with the wage and laws covering that individual. Thus, if you think you’ve subcontracted out certain services, you may want to “think again,” as you could be on the hook for wage and overtime violations along with the subcontractor.
4. This case is also significant because if a joint employment relationship exists, then for purposes of determining overtime, you must aggregate the hours worked by each employee at both employers in each week, which may put the count at over 40 hours for a week and trigger overtime pay for multiple, dozens, or even hundreds of employees.
5. Employers should carefully review their existing contracting relationships – both the underlying agreement and operation – to determine whether they can satisfy the Fourth Circuit’s new broad standard. If they cannot satisfy it, or will be unable to change the relationship to satisfy it, then they should work with the subcontractor to ensure that it is complying with applicable wage and hour laws.
6. At the same time, subcontractors should also take notice of this decision and preemptively achieve compliance with wage and hour laws to enhance the likelihood that a general contractor will engage or continue to engage their services.
7. Employers of course may explore alternative options, such as insourcing a job. Alternative options are fact and circumstance-dependent: there is no one-size-fits-all solution. You should seek counsel to advise you on the best course of action for your enterprise.
8. Finally, complicating matters even further, employers should be aware that the joint employment test utilized by the Fourth Circuit not only differs from the joint employment tests utilized by courts in other circuits in the wage and hour context, but it also differs from other joint employer tests utilized by other agencies that enforce, and other courts that interpret, other key federal and state employment laws, including family and medical leave, occupational safety and health, labor rights, and discrimination laws, for purposes of determining joint liability under those laws.

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