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FLSA Joint Employer

U.S. DOL Revises FLSA Joint Employer Standard

On January 13, 2020, the U.S. Department of Labor issued a new rule revising its test for evaluating joint employer status under the Fair Labor Standards Act. Among other situations, joint employer analysis is often critical to work arrangements involving staffing agencies and other outsourcing companies. The FLSA joint employer rule change takes effect on March 16, 2020.

Previous Joint Employer Test

In 2016, the U.S. Department of Labor under the Obama administration issued interpretative guidance that promoted greater scrutiny of joint business relationships. That guidance essentially created a standard whereby employers jointly employ workers whose work for one company “is not completely disassociated” from their work for the other company. This action prompted many businesses to change their traditional business practices for fear of incurring additional and unwanted liability for another party’s employees.

Despite this change in “guidance,” the DOL had not formally changed its joint employer rule since 1958.

Joint Employer Scenarios

The 2020 joint employer rule identifies two possible scenarios where joint employment could exist:

  1. Where the employee has an employer who employs the employee to work, but another person/entity simultaneously benefits from that work.
  2. Where one employer employs a worker for one set of hours in a workweek, and another employer the same worker for a separate set of hours in the same workweek.

The most significant revisions to the DOL’s standard relate to the first of these situations. The most common example arises when one company places its workers at the jobsite of another independent business to perform services. This could be a temporary placement by a staffing agency or a consulting firm, among other arrangements.

New Joint Employer Test

The primary thrust of the rule change lies in a new four-factor balancing test for evaluating joint employer status in the first type of scenario identified above.

The four factors ask whether the potential joint employer:

  1. Hires or fires the employee?
  2. Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree?
  3. Determine the employee’s rate and method of payment?
  4. Maintains the employee’s employment records?

While emphasizing these four factors, the new rule allows that:

“Additional factors may be relevant for determining joint employer status in this scenario, but only if they are indicia of whether the potential joint employer exercises significant control over the terms and conditions of the employee’s work.”

Irrelevant Factors

The rule also specifically disregards the question of whether the employee is “economically dependent” on the potential joint employer. That subject is now expressly irrelevant to liability under the FLSA.

The DOL identifies the following as factors that assess economic dependence and hence cannot be considered:

  1. Whether the employee is in a specialty job or a job that otherwise requires special skill, initiative, judgment, or foresight;
  2. Whether the employee has the opportunity for profit or loss based on his or her managerial skill;
  3. Whether the employee invests in equipment or materials required for work or the employment of helpers; and
  4. The number of contractual relationships, other than with the employer, that the potential joint employer has entered into to receive similar services.

The full text, with DOL commentary, of the new FLSA joint emlpoyer rule is available here.

Impact of Joint Employer Status

When two companies qualify as joint employers under the FLSA, they both share responsibilities under the law for workers’ wages. These obligations include the requirement to pay proper minimum wage and overtime.

How Will the New FLSA Joint Employer Test Affect Businesses?

In today’s economy, companies commonly outsource certain facets of their business. This trend has increased the number of outsourcing companies in the market that are willing to take on various services. Companies outsource a range of functions, such as information technology, payroll, or even marketing.

Parties who are outsourcing might want to re-evaluate whether they have joint employer status under the new DOL rule. However, the new standards only govern joint employer determinations under the FLSA. Companies must also consider joint employer status under other state and federal laws, including the Occupational Safety and Health Act, the National Labor Relations Act, and Title VII of the Civil Rights Act of 1964. While many federal agencies are moving toward less restrictive joint employer standards, the opposite is true in some states. Many states have their own minimum wage and overtime laws, for example, and some might trigger joint employer liability even where the FLSA, under the new rule, would not.

As a further caution, and beyond possible legal challenges to the validity of the DOL’s new interpretation of FLSA joint employer status, the 2020 rule’s longevity likely depends on the outcome of the next Presidential election. If a Democrat wins the White House, there is a strong possibility that this rule would be among a substantial package of workplace regulations that the next administration would revise once again.

For the above reasons, your company should not overreact to this single development. If potential joint employer liability is material to your operations, the new FLSA rule warrants further evaluation. But again, it would likely not be the only legal parameter affecting your approach to outsourcing and similar business strategies.

Best Practices Regarding Outsourced Staffing Arrangements

Though specific situations might justify alternative allocations of responsibility, here are some standard rules of thumb as a starting point for setting up or maintaining staffing transactions.

Whenever possible, the employer of record should be making all decisions with respect to conditions of employment, pay and method of payment, schedule, disciplinary actions, employee onboarding, and the maintenance of a personnel file. To the extent practical, that entity should also have direction and control over the work being performed. Almost every joint employer test used by government agencies focuses on those components. To reduce potential liability, companies should work together to modify any factors in the business relationship that raise red flags.

Businesses that are linked and jointly (or arguably jointly) employ workers should use this development as an impetus to review current contracts between the parties to make sure their respective responsibilities are in proper alignment. This review should include ensuring that liability and indemnity for claims have been addressed properly and fairly. Doing so can reduce exposure for both companies. You may want to engage the assistance of an attorney with co-employment experience to review the terms of your current contracts or assist with drafting an agreement to be used moving forward.

 

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Temporary Employees

Best Practices for Engaging Temporary Employees and Contract Workers

In today’s economy, businesses are always searching for an easy, yet inexpensive way to supplement their workforces as supply and demand fluctuate. One option is to use outsourced contractors–either individuals providing services as an independent contractors or temporary employees engaged through a third-party staffing agency. Many companies struggle with their legal responsibilities and risks in using contract workers. But those risks shouldn’t stand in the way of getting work done.

Co-Employment

A co-employment relationship exists where two or more companies have the right and obligation as an employer or joint employer to maintain responsibilities over the worksite, job duties, day-to-day job functions, and supervision of an individual. In a co-employment relationship both the employer of record (e.g., a staffing agency) and host employer (e.g., the staffing agency’s client) are legally responsible for complying with federal, state, and local employment laws. These include wage and hour requirements, leave entitlements, OSHA compliance, and discrimination and harassment claims.

Usually, hiring a contractor through a staffing agency to provide services as an independent contractor or temporary employee need not be any riskier than hiring an individual directly as a W-2 employee. However, if your company decides to utilize contractors, some preventative measures will better protect you and reduce the risk of future co-employment based claims.

Use a Reputable Staffing Agency

Whether you need a single person to complete one short-term project or have an ongoing need to supplement your workforce, you should adequately vet any staffing agency that you work with. The staffing agency should be financially stable, have extensive history providing services to clients in your industry that are similar in size and scope, and be able to provide reliable references. It should also have a reputation among employees and clients for always conducting business professionally.

The American Staffing Association maintains a searchable online directory of its staffing agency members.

Document the Relationship

While it is impossible to eliminate the risk of a claim arising as a result of a contractor being placed on assignment, you should have a well-drafted agreement that contains the parties’ expectations, legal responsibilities, and roles and responsibilities of each party. The contract should aim at reducing the overall risk of exposure to the company. This includes addressing indemnity obligations to apply if a claim arises.

At a minimum, the agreement should clearly define the staffing agency’s role as the employer of record and state the client company’s requirements for any contractor placed on assignment. This may include pre-employment background and drug screenings, reference checks, or credit checks. The agreement should also identify insurance coverage requirements and define the parties’ liability and indemnity obligations.

Proper Training

It is essential to educate company managers on the overall risks of co-employment. Company managers should understand that they will be responsible for the assignment of job duties and day-to-day supervision of the contractors, but the staffing agency, as the employer of record, is usually responsible for most other functions. This typically includes the recruiting, onboarding, employment, termination, payment of wages, reviews, and handling of disciplinary matters pertaining to temporary employees.

The staffing agency should review all documentation or formal communications between the company and temporary employees. It should clearly define the individual’s role as a company contractor to avoid confusion and reduce the risks of co-employment claims. This includes all company policies and procedures, training manuals, badges, company handbooks, and memos provided to the workers throughout their assignments.

It is also vital to educate company managers on the laws that pertain to joint-employer relationships. Managers need to understand that even though the contractor works directly for the staffing agency, the company still has a legal obligation to provide each contractor with a safe workplace free from discrimination and harassment. Since the company is benefiting from the services of the contractor, it is probably also jointly responsible for compliance with all applicable employment laws. Many managers will not recognize these legal responsibilities without focused training.

Disciplinary Matters Involving Temporary Employees

The procedure for handling the investigation and discipline of temporary employees can cause confusion. An improper approach can increase the risk of co-employment claims.

To the extent possible, the staffing agency (as employer of record) should handle the recruitment, onboarding, employment, and termination of contractors. Exceptions might be necessary in limited circumstances. Sometimes the host employer might have to terminate a temporary employee’s assignment immediately and even escort them out of the building. But if a situation like this arises, the staffing agency should be contacted immediately and advised of the termination. As employer of record, the agency should then contact the worker as soon as possible to follow up as appropriate.

Whenever a workplace investigation involves a temporary employee, the host employer should promptly involve the employer of record. The staffing agency should always have an agent present, either by phone or in person, for questioning of a temporary employee. A representative of the host employer will usually also be present during the interview. They might even conduct the interview. But an individual from the primary employer must be present to serve as a representation for the contractor, review the details, and be available to ask any necessary follow-up questions.  This is especially important if the investigation involves a workplace injury or a complaint that could result in an administrative claim or litigation. This approach also reduces the need for subsequent meetings between the parties to discuss what occurred and the appropriate corrective action.

Employee Benefits

Before engaging contractors, your company should review all benefit plans to confirm that they apply to direct employees only. Your plans and policies should expressly exclude workers engaged as temporary employees or independent contractors employed by a staffing agency or other third party. Address all benefits plans, including medical and dental insurance, 401(k), life insurance, workers compensation, and unemployment insurance.

If, alternatively, you intend to extend benefits to contract workers, carefully consider the legal ramifications. Doing so might convert the worker to direct employee status and interfere with the idea of engaging them as a contractor.

Keys to Remember

Here’s a final checklist to help you avoid co-employment claims from temporary employees and independent contractors:

  • Work with a reputable staffing agency that is familiar with your company’s industry.
  • Obtain a qualified candidate from the staffing agency.
  • Require and allow the staffing agency to manage the person properly during the assignment.
  • Proper management should include regular and consistent contact with the employee.
  • Provide co-employment training to your managers and human resources personnel involved in the day-to-day management of the temporary employees.
  • Don’t extend employee benefits to temporary employees or independent contractors.
  • Comply with all applicable employment laws regarding both direct employees and contractors.

 

Not sure whether someone working for you is an employee or independent contractor? Watch our recorded webinar for more on that issue.