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Staffing Firms and Joint Employer Liability: Important Recent Developments

September 25, 2020 by in "Two Minute Takeaway"

Smart staffing firms carefully assess their potential “joint employer” liability and try to minimize it.  There are several recent developments in this area that staffing professionals need to know.

What is a Joint Employer?

Under the joint employer doctrine, multiple parties may be considered to be an employee’s “employer” and therefore liable for violations of discrimination, wage and hour, labor, and other employment laws. 

For example, in the staffing context, even though a staffing firm may be responsible for properly calculating and paying overtime under the Fair Labor Standards Act, the client may be liable as a joint employer if there is a failure properly to pay wages.  Similarly, if a client’s supervisor sexually harasses an employee on assignment, the staffing firm may be liable as a joint employer even though the client committed the harassment.  

Carefully drafted engagement documents have cross-indemnification and duty-to-defend provisions allocating liability between the staffing firm and the client depending on the nature of the claim and the role of each party.  Unfortunately, many agreements do not contain this level of detail and one party may be exposed to unexpected legal liability for the conduct of the other party.  If it is a significant claim, that can be a horrible situation.   

Current Developments

To remedy the uncertainty caused by the joint employer doctrine, the Department of Labor recently promulgated a “control” test intended to clearly define the primary employer for purposes of minimum wage and overtime law.  The DOL Regulations considers only four factors to determine employer status:  whether a party (i) hires or fires the employee; (ii) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; (iii) determines the employee’s rate and method of payment; and (iv) maintains the employee’s employment records. 

Importantly, the DOL’s new control test more squarely places sole liability upon the staffing company rather than the client.  The prior test considered additional factors such as (i) whether an entity owned or controlled the location at which the employee worked; (ii) whether the employee worked solely for the benefit of the entity or also performed work that was unrelated to the entity; and (iii) whether the employee provided a service that was critical to the business of the entity.  Considering such factors made it easier for employees to assert claims against clients, which benefitted staffing firms when employees sought to recover against deep pocketed clients.

Significantly, the DOL Regulations apply only to the Fair Labor Standards Act, and therefore do not change the scope of joint employer liability for discrimination claims under Title VII, the ADEA, or the ADA.  Claims under those statutes are still governed by the broader joint employment test.  However, the EEOC has indicated that it intends to follow the DOL’s lead and issue regulations similarly limiting joint employer liability to control parties.

Court Flunks the DOL Regulations

On September 8, 2020, the Federal District Court for the Southern District of New York issued a decision invalidating the DOL Regulations.  In a detailed decision, the Court held that the DOL Regulations impermissibly contradict the FLSA and are arbitrary and capricious.  The Court held that the DOL had no basis to restrict joint employer status to parties exercising control in light of the extensive authority holding that a party’s status as an employer is determined expansively and based on many factors, including but not limited to, control.  This recent decision is favorable for staffing companies because invalidating the DOL Regulations reinstates the prior multi-factor test under which it is easier for an employee to sue a client.

Conclusion

It is too early to determine the ultimate status of the DOL Regulations.  The recent decision will not be the last word on the matter.  The DOL undoubtedly will appeal the decision and seek its reversal.  It also is unclear whether the decision will affect the EEOC’s plan to promulgate similar regulations relating to federal discrimination statutes.  In any event, these events make it an opportune time for staffing firms to brush up on their familiarity with the important joint employer doctrine, determine if the doctrine presents any potential liability to the firm, and to address any areas of exposure by updating engagement documents, particularly with respect to indemnification and duty-to-defend obligations.