Management's Workplace Lawyers

Fourth Circuit Expands Joint Employer Definition Under the Fair Labor Standards Act

January 31, 2017

On January 25, 2017, the U.S. Court of Appeals for the Fourth Circuit (which covers Maryland, Virginia, West Virginia and the Carolinas) announced a new and expansive standard for determining if two legally separate entities are joint employers for purposes of Fair Labor Standards Act (“FLSA”) liability.  The standard is likely to render companies that use subcontractors for labor jointly responsible for minimum wage and overtime violations. 

Facts of the Case:  In Salinas v. Commercial Interiors, Inc., a framing and drywall subcontractor (“J.I.”) owned by two brothers provided labor to Commercial Interiors, a company that offered general contractor and finishing services to clients.  Virtually all of J.I.’s business was with Commercial.  The drywall laborers supplied by J.I. were employees of J.I.

According to the undisputed facts, J.I. was responsible for hiring and firing laborers and for paying them, although on a few occasions, Commercial issued paychecks to some laborers.  At one point, Commercial directed some J.I. laborers to fill out employment applications with Commercial at a site that mandated certain insurance benefits for laborers (It did so because J.I. had difficulty in enrolling in the program.)  Commercial played a role is determining the daily and weekly schedules of the laborers, determining the start and end times and, on occasion, directing laborers to work additional hours.  Commercial’s superintendent also communicated site-specific staffing needs to J.I., who assigned laborers according to these requests.  Employees signed in each day on timesheets provided by Commercial, and Commercial’s foremen reported their time worked each day to Commercial’s main office.  Commercial, not J.I., retained records of time worked.

In addition, the J.I. laborers and supervisors wore shirts and hats bearing Commercial’s logos.  They performed their work using tools and equipment provided by Commercial.  Commercial foremen gave instructions to J.I. foremen about projects to be completed, and the J.I. foremen translated the instructions to the largely Spanish-speaking laborers.  At times, Commercial was the sole supervisory authority on the job.  J.I. employees were required to attend weekly meetings and periodic safety meetings conducted by Commercial. 

The laborers sued J.I. and Commercial for wage and hour violations under Federal and Maryland law, arguing that they were joint employers of the plaintiffs.  The district court granted summary judgment to Commercial, applying a test that turned on the generally recognized and bona fide nature of the relationship between companies and subcontractors and evidence that the arrangement was not created to avoid legal obligations under the FLSA. A jury found J.I. liable to the plaintiffs and J.I. went out of business. The plaintiffs appealed the dismissal of Commercial.

The Court’s Rulings:  The Fourth Circuit reversed the lower court and, under a new test for determining joint employer liability, found that Commercial was a joint employer of the J.I. laborers as a matter of law.  In a lengthy opinion, the Fourth Circuit panel held, “joint employment exists when (1) two or more persons or entities share, agree to allocate responsibility for, or otherwise codetermine—formally or informally, directly or indirectly—the essential terms and conditions of a worker’s employment and (2) the two or more persons’ or entities’ combined influence over the terms and conditions of the worker’s employment render the worker an employee as opposed to an independent contractor.” 

According to the Fourth Circuit, focusing in the first instance on the relationship between the putative joint employer and the worker, rather than on the relationship between the putative joint employers themselves did not shed light on whether the two entities were joint employers.  The question of whether two employers are joint employers “requires courts to determine whether the putative joint employers are not wholly disassociated or, put differently, share or codetermine the essential terms and conditions of a worker’s employment.” Economic dependence of the worker on the employer(s) is relevant to whether there is an independent contractor or employment relationship, which should not be examined in this context before the joint employer question is resolved. 

The Fourth Circuit identified a set of six non-exclusive factors that courts should consider in determining if two entities are joint employers.  They 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 emphasized that one factor alone may be sufficient to conclude that two entities are “not completely disassociated” so as to render them joint employers if the facts supporting that factor demonstrate that the entity has a “substantial role” in determining the workers’ terms and conditions of employment.

Under the facts before it, the Court found ample evidence that Commercial was the joint employer of J.I.’s laborers.  Commercial jointly supervised the work of the laborers, which satisfied the first factor.  As to the second factor, although Commercial did not formally hire or fire J.I.’s laborers, Commercial exercised authority over the laborers’ hours of work, days of work, staffing of projects, and in some cases, when they could incur overtime.  As such, the two entities were not “completely disassociated.”  Viewing the third and fourth factors together, the Court acknowledged that the two companies did not share any ownership interest.  However, the Court found Commercial was the nearly exclusive source of J.I.’s work and, after J.I. went out of business, Commercial continued to do business with the former J.I. owners under a new company.  Thus, this demonstrated a degree of permanency in the relationship and control by Commercial of the subcontracting entity so as to conclude that they were not “completely disassociated.”  The fifth factor – work at the putative joint employer’s site – manifestly was established and buttressed, said the Court, by the fact that Commercial required the laborers to sign in and out with Commercial’s foreman.  As to the sixth factor, Commercial’s provision of tools and equipment used to perform the work were responsibilities normally discharged by an employer. Furthermore, while Commercial did not issue paychecks, it kept track of the laborers’ time and maintained records, which also generally are employer responsibilities.

Having found that Commercial and J.I. were joint employers, the court then turned to the second question: whether in their “one employment” the labors were employees or independent contractors.  The question turns on the economic dependency, if any, of the workers on the employer.  The Court specified another six factors for this separate inquiry under established Circuit precedent: “(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.”  The Court did not, however, have to analyze these factors because the laborers already had been conceded to be employees of J.I. and thus, by definition, were “necessarily economically dependent on Commercial and J.I. in the aggregate.”

Practical Impact:  The Fourth Circuit has aligned itself with the DOL’s expansive position on joint employment under the FLSA adopted by the past Administration. Under this standard, traditionally recognized general and subcontractor relationships, which necessarily involve some coordination, are not entitled to different treatment.  With the standard being “complete disassociation” between the contracting companies, it is likely that most relationships will be found to be joint.  Moreover, under the Fourth Circuit’s standard, the reasonableness of a company’s decision to contract out employment services or its good faith does not have any impact on whether there is joint employment.  The breadth of the FLSA and the liberal interpretation of the employer/employee make for a different legal liability outcome than might apply in the commercial context. 

While this case could well lead to greater liability of contractors for wage claims by subcontractor or agency employees, some of this can be dealt with through contractual indemnification agreements, as well as requirements that subcontractors agree that they will comply with all laws, including the FLSA.  That, of course, requires that the third party providers be adequately capitalized so that, in the event of FLSA claims, the receiving employer is not “the only man standing” when such claims are pursued.

Finally, it is important to note that the Court made clear that the standards announced are not necessarily applicable to other statutes, like Title VII and the National Labor Relations Act, that have a narrower definition of the “employer/employee” relationship.

To see how the Fourth Circuit applied its standard in a case issued the same day involving technicians performing work for Direct TV through an independent contractor, click here.