Does your company use sub-contractors, rely on staffing services for temporary help, or have franchisees? Have you put a vendor compliance program in place? Answer “yes” to any of those questions, and new guidance from the Department of Labor is about to make life much more complicated.

On Jan. 20, David Weil, administrator of the department’s Wage and Hour Division, issued an Administrator’s Interpretation (AI), guidance that broadens how joint employer relationships—where two or more companies cooperatively employ workers—will be applied under the Fair Labor Standards Act, the Migrant and Seasonal Agricultural Worker Protection Act, Family and Medical Leave Act, and other labor-related laws.

“The growing variety and number of business models and labor arrangements have made joint employment more common and our need to address it more pressing,” Weil wrote, stressing that the guidance merely reflects and codifies “existing policy” and is intended as a “roadmap to compliance.” Critics, however, say the intent is to “expansively” define the concept of joint employment, restrict the use of contractors, and trigger enforcement actions that target large companies for the actions and oversights of their smaller partners, including, but not limited to, accurately paying the minimum wage and earned overtime.

The DoL guidance, for the first time, defines and differentiates between horizontal and vertical joint employment. The former scenario is when the operations of two or more employers are so entwined and overlapping that any claim to be separate is mere semantics. Vertical joint employment is when an employee of one company is economically dependent on the company that retained the services of his formal employer.

“It is not surprising that the Department of Labor would want to expand the definitions for who is a joint employer. It is consistent with what the NLRB is doing and I don’t think that is an accident.”

Tammy McCutchen, Principal, Littler Mendelson

An “economic realities” test is offered to determine vertical joint employer status and whether workers are misclassified. Among the assessments: the degree of control exercised over employees; whether the performed work is integral to the larger employer’s business; the permanency of the worker’s relationship with the employer; which entity invests in facilities and equipment, or provides tools and materials; who directs, controls, or supervises work; the control of employment conditions; and economic dependence. The new guidance offers a significantly broader definition of joint employers than the decades-old standard of showing direct control of contractors and franchisees that has, until recently, been used by the National Labor Relations Board.

The timing of the AI, at least tangentially, dovetails with moves by the NLRB to similarly broaden its criteria for determining joint employer relationships. A brief, but meaningful, statement in July 2014 by NLRB General Counsel Richard Griffin addressed labor complaints against McDonald’s, opining that when labor disputes arise the company can no longer insulate itself from complaints by claiming the independence of franchise owners. The memo suggested that the purported firewall between corporate and local owners isn’t enough for the chain to avoid being considered a joint employer and McDonald’s can no longer take a hands-off approach to labor matters because it exerts too much control over locally owned restaurants.

More recently, in an August 2015 ruling, the NLRB said that indirect control was enough to label waste management company Browning Ferris Industries and a staffing agency, Leadpoint Business Services, as joint employers.

The latest guidance is not sitting well with pro-business groups. The DoL is “codifying a radical concept of employer-employee relationships, and it is the most aggressive attempt yet to build on the flimsy foundation built by the NLRB’s Browning Ferris decision,” says Rob Green, executive director of the National Council of Chain Restaurants. “Setting up intentionally vague standards to govern the relationship between different businesses, including sub-contractors and franchisees, is a recipe for confusion, litigation, and overzealous enforcement.”

“Businesses can’t be held responsible for what they don’t control,” offered David French, senior vice president of the National Retail Federation. “Sub-contractors and franchisees are independent companies who make their own decisions on how to deal with their employees.”

THE SEVEN STEPS

The following is a summary of the seven-step “economic realities” test for joint employment presented in an Administrator’s Interpretation issued on Jan. 20 by the Department of Labor’s Wage and Hour Division.
Directing, Controlling, or Supervising the Work Performed
To the extent that the work performed by the employee is controlled or supervised by the potential joint employer beyond a reasonable degree of contract performance oversight, such control suggests that the employee is economically dependent on the potential joint employer. The potential joint employer’s control can be indirect (for example, exercised through the intermediary employer) and still be sufficient to indicate economic dependence by the employee. Additionally, the potential joint employer need not exercise more control than, or the same control as, the intermediary employer to exercise sufficient control to indicate economic dependence by the employee.
Controlling Employment Conditions
 To the extent that the potential joint employer has the power to hire or fire the employee, modify employment conditions, or determine the rate or method of pay, such control indicates that the employee is economically dependent on the potential joint employer. Again, the potential joint employer may exercise such control indirectly and need not exclusively exercise such control for there to be an indication of joint employment.
Permanency and Duration of Relationship
An indefinite, permanent, full-time, or long-term relationship by the employee with the potential joint employer suggests economic dependence. This factor should be considered in the context of the particular industry at issue. For example, if the work in the industry is by its nature seasonal, intermittent, or part-time, such industry condition should be considered when analyzing the permanency and duration of the employee’s relationship with the potential joint employer.
Repetitive and Rote Nature of Work
To the extent that the employee’s work for the potential joint employer is repetitive and rote, is relatively unskilled, and/or requires little or no training, those facts indicate that the employee is economically dependent on the potential joint employer.
Integral to Business
If the employee’s work is an integral part of the potential joint employer’s business, that fact indicates that the employee is economically dependent on the potential joint employer. Whether the work is integral to the employer’s business has long been a hallmark of determining whether an employment relationship exists as a matter of economic reality.
Work Performed on Premises
The employee’s performance of the work on premises owned or controlled by the potential joint employer indicates that the employee is economically dependent on the potential joint employer. The potential joint employer’s leasing as opposed to owning the premises where the work is performed is immaterial because the potential joint employer, as the lessee, controls the premises.
Performing Administrative Functions Commonly Performed by Employers
To the extent that the potential joint employer performs administrative functions for the employee, such as handling payroll, providing workers’ compensation insurance, providing necessary facilities and safety equipment, housing, or transportation, or providing tools and materials required for the work, those facts indicate economic dependence by the employee on the potential joint employer.
Source: Department of Labor

If a building management firm is potentially on the hook for labor violations alleged by employees of their office cleaning sub-contractor, then what’s the point in farming out that work? “A lot of firms are asking that question after the Labor Dept. all but warned that companies could be liable for the employment practices of other businesses they hire,” says Beth Milito, senior counsel for the National Federation of Independent Business. “This is a warning shot aimed just over the heads of businesses that hire other businesses. It’s not a regulation, but it will have the same effect because many firms are going to rethink their exposure and the result will be disruptive for small businesses.”

“If you’re a general contractor you can be drawn into lawsuits against your sub-contractors,” she adds. “That creates a real dilemma for businesses of every size. If you hire other firms for certain types of work, you may try to limit your exposure by discontinuing those relations and hiring direct employees to perform those services. Obviously that hurts the sub-contractors who are mostly small businesses.  But it also hurts the larger firms since their payroll costs are very likely to increase. It creates pressures on both sides of the contract.”

Both the substance of the DoL’s guidance and the process behind it is concerning to Tammy McCutchen, a principal at law firm Littler Mendelson and a former administrator at the agency’s Wage and Hour Division. “This is just one more of these administrative interpretations that they worked on in secret,” she says. “I haven’t talked to anybody yet on the employer side that knew this was coming.” The AI, by nature, didn’t require the notice and comment process required by a regulatory change.

“It is not surprising that the Department of Labor would want to expand the definitions for who is a joint employer,” McCutchen says. “It is consistent with what the NLRB is doing and I don’t think that is an accident … This is just another bullet in the DoL’s gun for going after big employers for violations by their business partners, not by them.”

The agency has been “surprisingly candid” in explaining that intent to target larger businesses, she adds. On the second page of the AI, Well writes that “where joint employment exists one employer may also be larger and more established with a greater ability to implement policy or systematic changes to ensure compliance. Thus, WHD may consider joint employment to achieve statutory coverage, financial recovery, and future compliance.”

The AI becomes particularly problematic when put into the context of vendor management. Both rules and guidance by various regulators have stressed third-party oversight. McCutchen tells of a large company that approached her for help developing a vendor compliance program that included periodic audits. “That sounds nice, but are you willing to become a joint employer with all of your vendors? There are a lot of companies out there that, because they were pushed to be better corporate citizens and responded to that call, have vendor compliance programs. Now, all of those compliance programs have the danger of making them joint employers.”

Facing the brunt of all this will be companies with franchisee arrangements as, by nature, they automatically meet various prongs of the “economic realities” test. Also, an unfortunate conclusion many in all sectors will draw: Do not retain the services of smaller companies at all or you are gong to be punished for it.

“The only way to protect yourself is to screen your sub-contractors very carefully,” McCutchen says. “Always include indemnification clauses in your contract so that if the DoL makes you pay you can go after them in a contract action to recover the money.”

“The bottom line is that this is the guidance that DoL investigators are going to be using,” she adds. says. “You have to live with it and do what you can to modify your business-to-business relationships to ensure they fall outside of the joint employment standards that the agencies have established.”