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Department of Labor Proposes End of Economic Reality Test

Edgar M. Rivera

On April 1, 2019, the United States Department of Labor (“DOL”) announced a proposed rule to narrow the definition of “joint employer” under the Fair Labor Standards Act (“FLSA”).

The FLSA allows joint employer situations where an employer and a joint employer are jointly responsible for the employee’s wages.  This issue frequently arises when a business obtains temporary workers through a staffing agency—creating a question of which entity qualifies as the temporary worker’s employer or whether both companies may be deemed as joint employers.  If a joint employer relationship is found to be present, both employers must meet labor requirements and, therefore, both may be held liable for alleged labor practice violations.

Based on Bonnette v. California Health & Welfare Agency, 704 F.2d 1465 (9th Cir. 1983), the DOL’s proposed test considers whether the potential joint employer actually exercises the power to: (1) hire or fire the employee; (2) supervise and control the employee’s work schedules or conditions of employment; (3) determine the employee’s rate and method of payment; and (4) maintain the employee’s employment records.  In sum, the proposed changes clarify that having the ability, power or contractual right to affect the other employer’s employees’ terms and conditions of employment is not relevant.  Rather, the putative joint employer must actually exercise or exert control over the other employer’s employees to be considered a joint employer.

The proposal is a rebuke of the Obama administration’s since-rescinded 2015 guidance on joint employment.  That guidance favored an expansive, six-factor “economic realities test.”  The economic realities test considers:

  • If the work performed is an integral part of the employer’s business, the worker is likely an employee.
  • If workers’ managerial skills present opportunities for profit or loss, they’re probably employees.
  • If an employer and worker invest in the employer’s facilities and equipment, the worker is most likely an independent contractor.
  • If the work performed requires special abilities and initiative, it could be a toss-up.
  • If the relationship between employer and worker is relatively permanent, the worker is likely an employee.
  • If the employer exercises or retains much control over a worker, the latter is likely an employee.

The economic realities test is presently the test used in the Second and Eleventh Circuits.  The Third Circuit, on the other hand, uses the “enterprise test,” which is similar to the Bonnette test.

Worker-advocacy groups will likely litigate this rule change.  According to Patricia Smith, a Labor Solicitor during the Obama administration and Senior Counsel for the National Employment Law Project, the DOL only has the ability to publish an “interpretive” rule, which would not hold the same force of law as other regulations.  “[It] doesn’t have rulemaking authority in order to make this a binding legislative rule,” said Smith.  Tammy McCutchen, a Wage and Hour Division Administrator for George W. Bush, had a conflicting take on this issue and claims that the DOL is empowered to issue regulations to clarify ambiguous parts of the FLSA.  The “DOL has authority to issue regulations on joint employment to better define very ambiguous definitions in the FLSA,” she said.

Many people, like those working for franchises or staffing companies, may have joint employers.  If you believe your employer is not paying you correctly, contact The Harman Firm, LLP.

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