Businesses frequently overlook the risk of liability under the Fair Labor Standards Act (“FLSA”) because they do not consider potential overtime and minimum wage claims by non-employees. A common tactic in FLSA litigation is for the plaintiffs to sue not only the business that employed them, but also related businesses or businesses that they worked for indirectly, alleging that the businesses are “joint employers.” The FLSA defines the terms “employer” and “employee” so broadly that a business may be held liable under the FLSA to individuals that were never even on its payroll. The Supreme Court has commented on the “striking breadth” of the FLSA’s definition of “employer” and “employee,” describing the usage of those terms in the FLSA as “the broadest definition that has ever been included in any one act.” As a result, the issue of whether a business is a joint employer is frequently litigated and various courts have developed different, and sometimes conflicting, tests of joint employment. On January 25, 2017, the Fourth Circuit set forth its own test for “joint employer” in Salinas v. Commercial Interiors, Inc., providing some clarity on this issue for employers within that jurisdiction (i.e., Virginia, North Carolina, South Carolina, West Virginia, and Maryland).
An individual may be an employee of more than one employer at the same time under the FLSA, but the law distinguishes between “separate and distinct employers” and “joint employers.” Separate employment exists when the two employers act entirely independently of each other and are completely disassociated with respect to the individual’s employment. If the employers are separate and distinct, each employer is liable only for the hours that the employee works for it and has no liability for the other employer’s FLSA violations. Where joint employment exists, on the other hand, the employee’s hours for both businesses must be aggregated each week, and if either business fails to pay the employee a minimum wage or earned overtime, then the businesses are jointly and severally liable.
Courts have developed different tests for determining whether a business is a joint employer under the FLSA. In the Salinas case, the Fourth Circuit bemoaned the lack of a coherent test and other courts’ focus on factors that the Fourth Circuit viewed as extraneous. In place of the various tests, the Fourth Circuit set forth its own list of factors that courts should evaluate in determining whether two or more persons or entities are joint employers under the FLSA:
- Whether the employers jointly determine, share, or allocate the power to direct, control, or supervise the worker;
- Whether the employers jointly determine, share, or allocate the power to hire or fire the workers or modify the terms or conditions of employment;
- The degree of permanency and the duration of the relationship between the employers;
- Whether, through shared management or ownership interest, one employer controls, is controlled by, or is under common control with the other;
- Whether the work is performed on premises owned or controlled by one or more of the employers; and
- Whether the employers jointly determine, share, or allocate typical employer responsibilities such as payroll, payroll taxes, providing workers compensation insurance, or providing the facilities, equipment, or materials for the work.
The Court emphasized that the determination of joint employment must be based on all the facts. However, because two businesses must be “entirely independent” in order to be considered separate and distinct under the FLSA, “one factor alone can serve as the basis for finding that two or more persons or entities are ‘not completely disassociated’ with respect to a worker’s employment if the facts supporting that factor demonstrate that the person or entity has a substantial role in determining the essential terms and conditions of the worker’s employment.”
In the Salinas case, the plaintiffs had sued both their employer J.I. General Contractors, Inc. (“JI”), and a separate business, Commercial Interiors, Inc. (“Commercial”), for unpaid overtime under the FLSA. JI employed the plaintiffs as drywall installers to work on JI’s subcontracts with Commercial. The relationship between JI and Commercial was a “‘traditionally … recognized,’ legitimate contractor-subcontractor relationship,” pursuant to which JI provided Commercial with labor. Notwithstanding that this was a real contractor-subcontractor relationship—and a fairly typical labor arrangement—the Fourth Circuit found that Commercial was a joint employer of the plaintiffs and thus jointly and severally liable with JI under the FLSA. The court listed several facts supporting joint employment, including: the plaintiffs performed nearly all of their work on Commercial jobsites for Commercial’s benefit; Commercial provided most of the tools, materials, and equipment plaintiffs used; Commercial supervised the plaintiffs’ work by having its foremen walk the jobsite to check on their progress; Commercial required the plaintiffs to attend meetings regarding their assigned tasks and safety rules; Commercial required the plaintiffs to sign in and out with Commercial foremen using Commercial’s timesheets; Commercial frequently directed the plaintiffs to redo deficient work; Commercial told the plaintiffs when to work additional hours; Commercial communicated its staffing needs to JI and JI based the plaintiffs’ jobsite assignments on those needs; Commercial instructed the plaintiffs to tell anyone who asked that they worked for Commercial; and Commercial provided the plaintiffs with hardhats and vests bearing Commerical’s logo to wear on the jobsite. Based on these facts, the Fourth Circuit concluded that Commercial was not completely disassociated from JI and did not act independently of JI with regard to the plaintiffs’ employment.
The takeaway for businesses, particularly those that use subcontractors on their jobsites, is that to avoid any risk of FLSA liability to the subcontractors’ employees there needs to be a complete separation of control regarding those employees. The general contractor should not supervise or direct their work, give them training, provide them with gear, tools, or materials, track their hours, or take on any other responsibilities regarding them. Of course, in many situations, it is impractical to avoid those actions and may even defeat the entire purpose of the subcontract. When that is the case, general contractors need to be aware of the risk of joint employment liability under the FLSA, and include robust indemnification clauses in their subcontracts to protect their business.