Think Using a Temp Firm Solves Your FLSA Compliance Problems? Think Again, Says the DOL
January 26, 2016
On January 20, 2016, the Wage and Hour Division of the U.S. Department of Labor issued a new Administrator's Interpretation ("AI") on the issue of joint employment under the FLSA. What is joint employment? The FLSA generally applies only to "employers." If a company or organization is an "employer" of a given employee, it's responsible for ensuring that the employee is paid in compliance with the FLSA. In many cases, it's easy to identify the employer of a given employee - its name appears on the employee's paycheck. But sometimes, the situation is more complicated.
In the new AI, the DOL states that the definition of "employ" under the FLSA is "expansive," and should be construed to be "as broad as possible." One consequence of this is that at any given time and for any given employee, there may be multiple entities that qualify as "employers" of that employee. When this occurs, the two entities are "joint employers." In the new AI, the DOL discusses two forms of joint employment: vertical and horizontal. We'll talk about horizontal joint employment in a separate post. Here, we will focus on the vertical variety.
What is vertical joint employment and why does it matter?
To understand this concept, consider the typical temporary employment scenario. Your company (we'll call it Acme) needs some temps to help out in the warehouse during the holiday season. So you go to a temp firm, Temps R Us, and ask them to send over five people. For the time period during which those temps are working at Acme, the DOL would probably take the position that Acme and Temps R Us are joint employers of the five.
Why does that matter to Acme? Suppose that Temps R Us fails to pay the temps the minimum wage for all of their work hours, or that it fails to pay them overtime at the correct rate when they work more than 40 hours in one week. The employees certainly can sue Temps R Us if they like. But because Acme is a joint employer, they can also sue Acme to recover their unpaid wages.
Wait just a minute, you might be saying to yourself. How can they sue Acme? Didn't Acme contract out responsibility for dealing with payroll and overtime to Temps R Us? It wasn't Acme's fault if Temps R Us dropped the ball. While that might be true, the point of the joint employment doctrine is that there are some responsibilities, including compliance with the FLSA, that an employer cannot contract out to a third party. Or, more precisely, you can contract out the work, but you're still on the hook for the results.
So does this mean that you risk liability for wage and hour violations every time you have an outside vendor sending people into your facility? Fortunately, no. Consider for example what happens when Acme has a leaky toilet. Acme doesn't employ its own plumbers - it calls a local plumbing contractor to come over and fix the leak. If the contractor is an individual, that person would likely be considered an independent contractor, not an employee, for purposes of the FLSA, because they are not "economically dependent" on Acme for their work according to the DOL's test. They're in business for themselves. (See our post on the DOL's recent Administrator Interpretation on independent contractors for a discussion.) The same is true if the plumber sends over one of her employees to fix Acme's leak: the worker is legally regarded as an employee of a separate business, because that separate business is not economically dependent upon Acme.
Of course, just like the line between independent contractor and employee, the line between mere customer and joint employer is not always so easy to discern. As explained in the new AI, there are many different factors that may be relevant to this analysis, and different courts considering the issue have formulated the inquiry in different ways. However, the DOL focuses particular attention on a seven-factor test drawn from the regulations governing the Migrant and Seasonal Acricultural Worker Protection Act ("MSPA"). The factors used there are:
- The extent to which the work performed by the employee is controlled or supervised by the potential joint employer "beyond a reasonable degree of contract performance oversight."
- The extent that the potential joint employer has the power to hire or fire the employee, modify employment conditions, or determine the rate of pay.
- The degree of permanency of the relationship between the employee and potential joint employer.
- The extent to which the employee's work for the potential joint employer is repetitive, rote, unskilled, and/or requires little or no training.
- The extent to which the employee's work is integral to the potential joint employer's business.
- Whether the employee performs work on premises owned or controlled by the potential joint employer.
- Whether the joint employer performs administrative functions in relation to the worker, such as handling payroll, providing workers' compensation insurance, furnishing facilities and safety equipment, providing housing or transportation, or furnishing tools and material required for the work.
If this list seems similar to the list of factors for determining whether a worker is an employee versus an independent contractor, that is no coincidence. The DOL maintains that the ultimate question in both cases is the same: is the worker economically dependent on the potential employer/joint employer?
What Should Employers Take Away From The New AI?
The DOL's latest AI doesn't necessarily break any unprecedented legal ground in its analysis, particularly when viewed in light of the AI on independent contractors issued last summer. However, it does shine a spotlight on an areas that many employers simply don't consider when they think about wage and hour compliance.
If your organization uses temps, contract workers, leased workers, or similar personnel, here are some of the issues you should be considering:
- Employers are responsible for ensuring that all of their employees are properly paid. In many cases this includes workers who are employed indirectly or by a third party, such as temps or workers employed by a contractor or PLA.
- This means that employers can be liable for a vendor's screw-up. If your temporary staffing agency isn't paying minimum wage, or isn't paying people overtime at the proper overtime rate for all hours worked over 40 in a single workweek, that's your problem as well as theirs. This means that you need to pay attention to your business partners. Choose reputable, well-established firms, even if it means paying a little bit extra. And ask about legal compliance including wage and hour compliance before you contract with anyone to provide labor for your organization. Don't use staffing firms that have a history of wage and hour violations or that have a casual attitude toward recordkeeping and payroll.
- If you get wind that anyone working for your organization via a vendor is not being properly paid, don't just dismiss it as "not my problem." Look into it immediately, and insist that the vendor correct any issues that may arise. If they don't, find a new vendor.
- Employers who use staffing firms, temp agencies, employee leasing arrangements, etc., need to carefully look at the legal documents establishing these relationships. Most staffing agency agreements are bare-bones and deal mostly with the fees due to the staffing agency. They are not designed to protect the client's interests. Before any workers set foot on your worksite, insist on language in your agreement expressly delegating responsibility for wage and hour compliance to the vendor and obligating vendor to indemnify and defend your company if they fail to pay people as legally required. You might still be sued, but at least an indemnity clause gives you a better chance of recovering any resulting expenses.