Are You at Risk for Vertical or Horizontal Joint Employment?

What is Joint or Co-employment?

The legal doctrine of joint or co-employment states that a worker, or a group of workers, can be considered the employee of more than one employer. Because an increasing number of workers today are engaged via staffing firms, temporary placement firms, franchises, or other third-party arrangements, this doctrine is central to understanding today’s workforce.

The co-employment principal is well established under the Fair Labor Standards Act (FLSA), but the statutory language of the Act can be vague or open to interpretation. In January, Dr. Jay Weill, Administrator of the Wage and Hour Division of the Department of Labor, clarified what is meant by co-employment under the FLSA and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA).

In the Interpretation, Weill points out that both the FLSA and MSPA cover joint employment relationships, and asserts the intent of these statutes is to cover most workers under a broad definition of who is an employee. “The concepts of employment and joint employment under the FLSA and MSPA,” Weil emphasized, “are notably broader than the common law concepts of employment and joint employment, which look to the amount of control that an employer exercises over an employee.” In essence, the Department of Labor’s view of who qualifies as  an employee and what constitutes joint employment will be more inclusive than most courts.

Potential Joint Employers: Horizontal joint employment and Vertical joint employment.

 An employment arrangement should be considered a horizontal joint employment if “an employee is employed by two (or more) technically separate but related or overlapping employers.” The focus is on the relationship of the employers; for example, when a waitress works at different restaurants owned by the same entity.

Vertical joint employment covers arrangements which occur when an employer acts as intermediary employer that provides some employer functions (typically payroll and hiring), for workers whose services are for the benefit of a potential joint employer. Examples of vertical joint employment arrangements are workers engaged via staffing firms, farm labor contractors, or general contractors in the construction trades that engage a subcontracting firm. A key question in this scenario is if the intermediary employer is an employee of the potential joint employer. Generally, the intermediary is in a contractual relationship with the potential joint employer, not an employee.

The complete text of the Administrator’s Interpretation may be found here.

Takeaways for Employers

• The legal principal that an employer can be found to be a joint or co-employer is well established. The two main tests of a joint employer are the “economic reality” test and the “control and direction tests.”
• The Department of Labor recognizes that joint employment arrangements are commonplace, but will expansively define who is a potential “joint employee” under the FLSA and MSPA.
• Joint employment arrangements can occur as horizontal joint employment (arrangements where the potential joint employers share a common legal or ownership arrangement), or as vertical joint employment (arrangements where a worker is engaged for the benefit of a third party who benefits from the employee’s work, usually by providing a payroll or human resources function).
• If the employee’s work must be performed on your business premises, or if you must exercise direction and control over the worker and the working conditions, the greater the likelihood you will be considered a potential joint employer. If the work is integral to your business, or if the worker is performing services similar to an employee, the greater the likelihood you will be considered a potential joint employer.
• If your company engages workers through a third party, such as a staffing firm or temporary agency, ensure the firm is familiar with all federal and state labor, health, and safety laws. Work with firms that correctly categorize their workers with regard to their eligibility for overtime pay (exempt non-exempt status).
• If your firm allows a third party agency or staffing firm to provide workers who are categorized as independent contractors, be cautious. If that agency has misclassified the worker and the worker later files for overtime, worker’s compensation or unemployment benefits, you could be deemed liable as a potential joint employer who had the benefit of the worker’s services. This is especially true if the worker’s services are integral to your business, or if any of the other conditions of vertical joint employment are present.