How Companies With Shared Workers Should Prepare for the DOL’s New Joint Employer Rule

Employers with interrelated businesses and shared employees may get more clarity on their liability for wage and hour issues through a proposed rule from the U.S. Department of Labor (DOL). Issued April 22, the rule explains what may qualify related entities as “joint employers” under federal wage and hour statutes.

The rule is open for public comment until June 22 and could be finalized and enacted this year. Employers should prepare now. Those who may be affected by this rule, such as franchisors and staffing agencies, should evaluate whether the rule would impact their status and adjust their policies and agreements to limit risk.

What will the proposed rule change for employers?

In the press release for the proposed rule, the DOL’s Wage and Hour Division Administrator Andrew Rogers stated that the proposal will “reduce compliance and litigation costs for employers” by providing “much-needed regulatory clarity” on the issue of joint employment. The department indicated that its goal is to provide clarity on a “dearth of departmental regulatory guidance” and resolve splits among circuit courts.

The proposed rule is the current administration’s first effort to address joint employer status since the rule enacted during the first Trump administration was rescinded under the Biden administration in 2021.

The prior rule established a strict “actual control” standard which made it more difficult for companies to be held liable for labor violations by franchisees or subcontractors. That rule, which applied only to the Fair Labor Standards Act (FLSA), was vacated in 2020 by the U.S. District Court for the Southern District of New York. The court held that a key component of the rule exceeded and contradicted the text of the FLSA. Later, the Biden administration’s DOL fully rescinded the rule.

This new rule joins the March 4 proposed rule, which would expand when workers qualify as independent contractors. Both signal an effort to replace Biden-era labor policies with updated versions of the policies in place during the first Trump term. The March 4 rule also expanded its earlier counterpart by applying to the FLSA, Family and Medical Leave Act (FMLA) and Migrant and Seasonal Agricultural Worker Protection Act (MSPA).

What do employers need to know to prepare for the latest proposed rule?

The proposed rule includes discussion of the historical interpretations of all three cited statutes, evaluating how both agencies and federal courts have interpreted the nature of joint employment. It also outlines the status of the 2020 FLSA rule and its rescission. Ultimately, the rule proposes to “readopt” the regulatory text from the 2020 rule, with some changes.

The rule discusses two types of joint employment:

• • • “Vertical” joint employment means that a worker has a traditional employment relationship with one employer, but another employer controls their employment. In other words, the two employers “simultaneously benefit” from the employee’s work. Examples of entities who may be vertical joint employers are contractor/subcontractors who employ individuals, retailers/vendors, and franchisors/franchisees.

Vertical joint employment involves an analysis of four factors, namely where the indirect employer:

1. 1. 1. 1. 1. 1. 1. Hires or fires the employee
                  2. Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree
                  3. Determines the employee’s rate and method of payment
                  4. Maintains employment records

• • • “Horizontal” joint employment means that a worker works separate hours for two or more entities during the same workweek, but the two entities are sufficiently associated with each other with respect to the employee’s employment.

The analysis focuses on the employers’ relationship and excludes situations where the business relationship is not related to the employment of specific workers. The rule provides three examples of “horizontal” joint employment:

1. 1. 1. 1. 1. 1. 1. There is an arrangement between the employers to share the employee’s services
                  2. One employer acts directly or indirectly in the interest of the other with respect to the employee
                  3. The employers share control of the employee because one controls, is controlled by, or is under common control with the other employer

The proposed rule explicitly provides that factors used to determine whether an employee is an employee or independent contractor, namely the employee’s economic dependence on the employer, are not relevant to this determination. Additionally, for a joint employment relationship to exist, both employers must exist as separate entities.

What can employers expect next?

A joint employment relationship has complications for related entities. A finding of a joint employment relationship means that the multiple employers are jointly and severally liable for wages, damages, and relief owed to employees under federal wage and hour statutes.

This proposed rule could make it more difficult for courts to find that two entities have a joint employment relationship. However, by expanding on the 2020 rule’s “actual control” standard, the DOL avoids the issues that led the Southern District of New York to vacate the rule and adds nuance to the determination of a joint employment relationship.

While the rule is not yet in effect, employers who may be affected should evaluate any job-sharing agreements and review their wage and hour policies and FMLA leave procedures for compliance. Phelps will continue to monitor the proposed rule and how it might intersect with federal circuit rulings on joint employment status.

Contact Andrew M. Albritton or any member of the Phelps labor and employment team with questions or for compliance advice and guidance.