United States: Employers Can't Outsource Their Joint Employer Liability

A recent Second Circuit decision and a recently issued Department of Labor (the "DOL") Administrator's Interpretation demonstrate that courts and the DOL are united in their views that the Fair Labor Standards Act's (the "FLSA") definition of "employer" is expansive and that large companies should be on the hook when their contractors fail to adhere to the FLSA. In short, employers may be surprised to find that employees of their contractors are deemed to be their employees for purposes of compliance with wage and hour laws.

In mid-March, the Second Circuit issued a summary order vacating the summary judgment dismissal of claims brought by security guards who were contracted via a separate, now-defunct entity, to work at AT&T stores. In determining whether AT&T was a joint employer, the court in Grenawalt v. AT&T Mobility, LLC, 15-949-cv (2d Cir. March 14, 2016), followed and arguably expanded upon its earlier decisions on the topic. The court looks to the "economic reality" of the employment circumstances via a three-factor test, but a fact pattern need not satisfy all factors.

First, the court determines who exercises "formal control" over the employee, but even if the potential joint employer does not maintain formal control, the company is not out of the woods. Second, the court looks at whether the employees "depend upon someone else's business . . . or are in business for themselves." This test reeks of the standard used for assessing classification as an independent contractor. Third, and the operative test for the purposes of Grenawalt and most joint employer assessments, the court evaluates whether the potential joint employer exercised "functional control" and applies the test provided in Zhen v. Liberty Apparel Co., 355 F.3d 61 (2d Cir. 2003). To do so it looked at the following factors:

• Did employees use the other company's premises and equipment?This factor is among the easiest to fulfill in an effort to establish joint employment.
• Did the contractor have a business that could or did shift employees from one client to another?In Grenawalt, the employing entity existed only to serve AT&T through another entity.
• Did the employees perform "a discrete line-job that was integral" to the company process of production?The court explained that the fact that guards arguably possess specialized skills that are distinct from AT&T's retail employees weighed against joint employment.On the other hand, to the extent the guards' duties required that they greet customers or otherwise assist store managers, such duties weighed in favor of joint employment.The court explained that the workers'job need not be "indispensable" to satisfy joint employment.
• Could responsibility under the contractpass from one employer to another without a material change? The court indicated that the question is whether the same employee would do the same work in the same place if the employing entity changed.The fact that several of the security guards worked for a new employer that contracted with AT&T at the same locations weighed in favor of joint employment.
• To what degree did the company's employees supervise the purported employees?In Grenawalt, the security guards were largely supervised by AT&T's store managers and not by their employer.
• Did the employee work exclusively or predominantly for the company? Because the security guards worked only in their assigned AT&T stores, this factor weighed heavily in favor of joint employment.

The court explained that the existence of these factors is a matter of fact and thus difficult to determine on a motion for summary judgment.

The DOL is in wholehearted agreement with the Second Circuit's expansive approach to determining joint employer liability. In January, the head of the DOL's Wage and Hour Division (the "WHD"), David Weil, released an Administrator's Interpretation (the "Interpretation") in which the DOL took dead aim at large companies. He explained:

In making this pronouncement, the WHD expects potential joint employers to hold their vendors' feet to the fire in order to ensure that such vendors are complying with the FLSA. The implications for not doing so are significant, as the Interpretation explains that each employer is individually responsible for the entirety of any unpaid wages. Thus, if its vendor files bankruptcy or otherwise does not have assets necessary to pay damages, the so-called joint employer is on the hook.

In the wake of the Second Circuit's jurisprudence and the DOL's pronouncements in the Interpretation, companies that use vendors to provide services on an outsourced basis should carefully consider whether they may be deemed to be joint employers. Where that risk exists, companies should contemplate taking steps to ensure that their vendors adhere to all local and federal labor laws and have sufficient assets to cover damages for unpaid wages, and should proactively investigate and force the vendor to remedy potential labor law violations. While indemnification clauses with vendors for joint employer liability remain helpful, if your vendor does not have the financial wherewithal to make good on the indemnity, such clauses will be of little use. Ultimately, this expansive definition of "joint employer" may have the unintended effect of economically boosting larger, more established vendors to the detriment of smaller, newer businesses.

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