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Are You a Joint Employer?

Companies that use a lot of subcontractors have long awaited clarification of the joint employer rules under the Fair Labor Standards Act (FLSA). Designation as a joint employer is a critical distinction, since joint employers are responsible for payment of wages and compliance with overtime rules.

Historically this issue has been most important in the construction industry, where the use of subcontractors is commonplace. Today, however, the impact is more widespread, as the “gig” economy makes use of subcontracted labor…Uber, Lyft, etc. In some jurisdictions, there has been a movement in some jurisdictions to classify franchisors as joint employers of the employees of their franchisees.

The U.S. Department of Labor recently issued a Final Rule to update the joint employer regulations, effective March 16, 2020. The most important part of the Rule is a four-factor balancing test for determining FLSA joint employer status where an employee performs work for one employer that also benefits another employer. This test considers whether the potential joint employer:

  • Hires or fires the employee;
  • Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
  • Determines the employee’s rate and method of payment; and
  • Maintains the employee’s employment records

In general terms, a potential joint employer must do one or more of these things to be considered a joint employer, but as usual, the devil is in the details.

The Rule considers “additional factors” that may be relevant in the determination. As a result, it would be prudent for employers to review the complete Rule to see which provisions may impact them.

In the construction world it is not uncommon for general contractors (GC’s) to use the same subcontractors continuously. Over time the relationship between the parties can morph into an employment type relationship with the GC managing the subcontractor and its employees as if they were employees of the GC. While this was never consistent with the spirit and intent of the law, the new ruling better clarifies how employers can cross the line to becoming a joint employer.

The rule also discusses the situation where an employee works a number of hours for one employer and a number of hours for a second employer. Obviously, to the extent the two employers are related, the more likely it is that there will be joint employer status. The Rule gives specific examples in this area as well.

The Final Rule can be found here.

As always, consult your HR advisor or legal counsel for guidance on all personnel matters.  

About the Author
Doug Jones is part of our fractional CFO & controller practice, providing senior financial management services to small and mid-size organizations on an “as needed” basis. In addition to serving his own clients, Doug manages relationships with companies using other fractional resources on a short-term, long-term or project basis. Doug has over 25 years of experience as a CFO with various middle market companies, in addition to experience with several Fortune 500 firms. Doug holds the Certified Management Accountant (CMA) designation. Contact us.