US DOL Proposes New Joint Employer Rule

The U.S. Department of Labor’s (DOL) Wage and Hour Division has proposed a rule (Proposed Rule) on joint employer status under the FLSA, FMLA, and the Migrant and Seasonal Agricultural Worker Protection Act. The goal is to create a single nationwide standard for when multiple entities share responsibility for wages, damages, and other obligations under these laws. This is now decided by court decisions, leading to differing standards across the country.

This Proposed Rule is important for businesses with franchise systems, staffing agencies, contractor relationships, or similar models that involve shared control over workers, as these arrangements often risk being classified as joint employers with shared legal obligations.

Relevant Background

The Proposed Rule distinguishes between “vertical joint employment” and “horizontal joint employment.” Vertical joint employment is where an employee is employed by an employer for work, and another person or entity simultaneously benefits from that work as, or in the manner of, an employer, whereas horizontal joint employment occurs when an individual works for two or more separate but associated employers who are sufficiently associated with each other regarding the employee’s employment.

Vertical Joint Employment

The Proposed Rule sets forth a four-factor test to determine whether a vertical joint employment relationship exists, focusing on the economic reality of a potential joint employer’s control over the employee, whether direct or indirect.

The factors include whether the potential joint employer:

• Hires or fires the employee;

• Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;

• Determines the employee’s rate and method of payment, and

• Maintains the employee’s employment records.

  
  

None of the four factors is intended to be dispositive. While the Proposed Rule highlights additional factors that may be considered, including a worker’s continued and related relationship with a potential joint employer or a worker’s economic dependence on a potential joint employer, these factors are generally less relevant to the primary four factors. Further, while the potential joint employer’s ability to exert control over workers is considered, the Proposed Rule notes that the actual exercise of control is more relevant. Finally, the Proposed Rule identifies certain factors that are irrelevant to the determination and are more generally associated with determining whether a worker is an independent contractor, including whether: (i) the worker’s role requires special skill, initiative, judgment, or foresight; (ii) the worker has an opportunity for profit or loss; and (iii) the worker invests in equipment or materials necessary for their role.

Horizontal Joint Employment

The Proposed Rule largely retains the analysis from pre-2020 regulations on horizontal joint employment, focusing on the relationship between employers and considering all the facts and circumstances to determine whether the employers are sufficiently associated with respect to the employee's employment. Under the Proposed Rule, two employers would be considered sufficiently associated if:

There is an arrangement between them to share a worker’s services;

• One employer is acting directly or indirectly in the interest of the other employer in relation to the employee; or

• They share control of the employee, directly or indirectly, because one employer controls, is controlled by, or is under common control with the other employer.

The Proposed Rule provides that certain business relationships, like engaging the same vendor or being a franchisee of the same franchisor, are insufficient on their own to establish that two entities are sufficiently associated. However, where there is horizontal joint employment, employees’ total weekly hours for each employer must be aggregated, and each employer would be jointly and severally liable for wages due under the Applicable Statutes.

Considerations

The Proposed Rule states that common business arrangements, like legal obligations, health and safety rules, or providing a sample handbook, do not alone establish joint-employer status. The DOL clarified that contractual obligations, such as quality control, deadlines, or deliverables, do not impact joint-employer status. However, if a potential joint employer exercises control over workers regarding standards or policies, it may indicate joint-employer status. The Rule emphasizes the overall activity and focuses on factors related to workers' wages and conditions. 

Potential Impact

If adopted, the Proposed Rule would affect a broad range of business arrangements in which more than one entity is involved in workers’ terms and conditions of employment. The Proposed Rule is most likely to have a significant impact on:

• Franchise relationships;

• Staffing agency arrangements;

• Subcontracting structures;

• Outsourcing models; and

• Other partnership or business arrangements involving shared authority over hiring, scheduling, compensation, or employment records.

The DOL’s Proposed Rule is a potentially significant development in the federal joint employer doctrine as it applies to the Applicable Statutes. Companies with business models involving shared control over workers should evaluate their arrangements in light of the proposed framework.

Businesses should remember that the Proposed Rule applies only to these laws. A different framework applies under other federal laws, including the recently finalized National Labor Relations Board rule addressing joint employer liability under the National Labor Relations Act, as well as under state laws.