New FLSA Test for Joint Employers in Fourth Circuit—If You Use Subcontractors, Pay Attention!

the situation

A general contractor regularly engages a certain subcontractor to do drywall installation needed on its jobs.  The subcontractor works almost exclusively for the general contractor.  If the employees of the subcontractor are not paid overtime as required by the FLSA, can the general contractor face liability?

the ruling

Yes, if the general contractor is found to be a joint employer of the aggrieved employees. And in a recent decision, the Fourth Circuit Court of Appeals has outlined a new test for determining whether a joint employment relationship exists.  Salinas, et al. v. Commercial Interiors, Inc., et al., No. 15-1915 (4th  Cir. Jan. 25, 2017).

J. I. General Contractors was a framing and drywall installation company.   Commercial Interiors, Inc., a general contracting company, hired J. I. as a subcontractor to do drywall as needed. Virtually all of J. I.’s work was on Commercial Interiors’ jobs, with the exception of a few jobs taken on by J. I. when Commercial Interiors did not have any work for it.

In 2012, a number of J. I. workers filed a collective action under the FLSA, claiming that they were jointly employed by Commercial Interiors and J. I. and that these entities had willfully failed to properly pay their wages, including overtime.  Commercial Interiors moved for summary judgment on the grounds that it did not jointly employ these plaintiffs.  The district court applied a five factor test which focused on the legitimacy of the contracting relationship between J. I. and Commercial Interiors and whether the two entities intended to evade federal and state wage and hour laws and, based on this test, concluded that Commercial Interiors did not jointly employ the plaintiffs.  But after this issue was appealed, the Fourth Circuit ended up reversing the lower court’s decision, agreeing the lower court had used the wrong test and that Commercial Interiors was a joint employer of the plaintiffs.

Joint employers are responsible for compliance with the FLSA, including the overtime provisions, for all of an individual’s employment for a workweek. Thus, all of the hours worked for each joint employer, must be aggregated to determine if the employee has worked overtime.  So, the bottom line is that not only are joint employers joint and severally liable for FLSA violations, but that finding a joint employment relationship may affect the analysis of whether there has been a violation, notonly who is liable.

The Fourth Circuit found that the existing tests (including the one used by the district court) focus on the wrong issue, including the relationship between a putative joint employer and a worker instead of the relationship between the putative joint employers and view joint employment as a question of economic dependency.

The court set out a new test for determining whether two persons or entities are joint employers under the FLSA—namely whether two or more persons are “not completely disassociated” with respect to a worker such that the persons or entities share, agree to allocate responsibility for, or otherwise codetermine (formally or informally, directly or indirectly) the essential terms and conditions of employment and laid out six factors to consider in making this determination:

(1)    whether, formally, or as a matter of practice, the putative joint employers jointly determine, share or allocate the power to direct, control, or supervise the workers, whether by direct or indirect means;
(2)    whether, formally or as a matter of practice, the putative joint employers jointly determine, share, or allocate the power to—directly or indirectly—hire or fire the worker or modify the terms or conditions of the worker’s employment;
(3)    the degree of permanency of the relationship between the putative joint employers;
(4)    whether, through shared management or a direct or indirect ownership interest, one putative joint employer controls, is controlled by, or is under common control with the other putative joint employer;
(5)    whether the work is performed on a premises owned or controlled by one or more of the putative joint employers, independently or in connection with one another; and
(6)    whether, formally or as a matter of practice, the putative joint employers jointly determine, share or allocate responsibility over functions ordinarily carried out by an employer, such as handling payroll; providing workers’ compensation insurance; paying payroll taxes; or providing the facilities, equipment, tools or materials necessary to complete the work.

Although these factors should be considered, the court also pointed out that these are not the only considerations, but rather if there are other facts that go to the “fundamental threshold question” of whether a potential joint employer “shares or codetermines the essential terms and conditions of a worker’s employment,” they should be considered as well. Also, all of the factors and all of the circumstances must be considered—no one factor is determinative.

In this case, the court found that almost all of the factors supported a finding that Commercial Interiors and J. I. were not completely disassociated with respect to the plaintiffs’ employment and thus that Commercial Interiors was a joint employer of the plaintiffs.

the point

The fact that a company is found to be a joint employer for purposes of the FLSA does not mean that it is a joint employer for the purposes of other federal and state laws.  However, employers who regularly make use of subcontractors need to pay close attention to this new test and be aware that the question of the legitimacy of their relationships with these subcontractors is no longer dispositive.  Companies need to be aware of their vulnerabilities in terms of potential wage and hour claims and endeavor to insure that any subcontractor is also complying with the FLSA.