4th Circuit adopts new FLSA joint employer test, finds general contractor, sub jointly liable for overtime

Filed under: News |

By Joy Waltemath

By Lisa Milam-Perez, J.D.

In a significant decision contemplating the proper measure of joint employment under the FLSA, the Fourth Circuit cast aside the familiar Bonnette test and its derivatives, instead establishing a more detailed two-step framework for determining whether two entities are joint employers of a given employee or group of employees. With the Secretary of Labor, a laborer’s union, and several employee advocacy groups weighing in as amici, the appeals court reversed a district court’s determination that a class of drywall installers were not jointly employed by their direct employer and the construction contractor with which their employer contracted almost exclusively, having discerned no nefarious plot to skirt wage laws. But the appeals court rebuffed this homespun test and, applying its new approach to the facts at hand, held the defendants were jointly and severally liable for overtime violations and that the plaintiffs’ weekly work hours should be aggregated for purposes of calculating overtime hours worked (Salinas v. Commercial Interiors, Inc., January 25, 2017, Wynn, J.).

Installers file overtime suit. The drywall installers filed a putative class and collective action under the FLSA and Maryland wage statutes, contending they were jointly employed by a drywall contractor and subcontractor and that, as such, their work hours had to be aggregated to determine whether the defendant companies owed them overtime. They also asserted that the companies were jointly and severally liable for those wage violations. Rejecting that notion, the district court found the defendants had simply entered into a legitimate “traditional” subcontracting relationship and that there was no evidence the business relationship was intended to evade the requirements of federal or state law. Noting, however, that “the legitimacy of a business relationship between putative joint employers and the putative joint employers’ good faith are not dispositive of whether entities constitute joint employers for purposes of the FLSA,” the appeals court reversed. Its lengthy decision ruminated on the remedial goals of the FLSA, the “striking breadth” of the definition of “employee” under the FLSA (to quote the Supreme Court), and the “venerable” and “entrenched” standing of the joint employment doctrine.

Rejecting Bonnette. Courts have constructed a hodgepodge of tests for construing joint employer status, none of which has found consensus support, the appeals court observed. It placed much of the blame for the resulting confusion at the feet of the Ninth Circuit and its 1983 decision in Bonnette v. California Health and Welfare Agency. That opinion established four nonexclusive factors for gauging joint employer status, but it said that none were etched in stone and what really mattered was the totality of the circumstances. The test was sprung from common-law agency principles, however, and it failed to account for the expansive definition of “employee” envisioned under the FLSA. Consequently, courts took the Bonnette factors and riffed off that framework for FLSA purposes.

Relationship between putative joint employers. In addition to erroneously looking to common-law agency principles, there were two other problems with using the Bonnette factors or the variant tests they have spawned in the joint employment context, according to the Fourth Circuit. First, the factors “improperly focus on the relationship between the employee and putative joint employer, rather than on the relationship between the putative joint employers.” Consequently, they don’t address whether the two entities are “entirely independent” or “not completely disassociated” from each other when it comes to the essential terms and conditions of a worker’s employment, and thus, whether they are the worker’s “one employment” for FLSA purposes.

Secondly, the Bonnette approach and its progeny “incorrectly frame the joint employment inquiry as a question of an employee’s ‘economic dependence’ on a putative joint employer” as a matter of economic reality. But this confuses the joint employment issue with the “employee vs. independent contractor” inquiry. As a result, there is no coherent test among the many Bonnette-based tests. “Accordingly, district courts should not follow Bonnette and its progeny in determining whether two or more persons or entities constitute joint employers for purposes of the FLSA,” concluded the appeals court.

Reworking Schultz. Under the Fourth Circuit’s two-step analysis of joint employment under the FLSA in Schultz v. Capital Int’l Sec., Inc., a 2006 decision, courts first assess whether two entities are joint employers; then they analyze whether the worker in question is an employee or independent contractor of that combined entity (if step one deems them joint employers), or of each entity individually (if it does not). The court used the Department of Labor’s FLSA regulations as the starting point for step one, focusing on the nature of the relationship between putative joint employers.

However, the appeals court had not set forth specific factors to consider, leaving a vacuum in which district courts within the circuit crafted multifactor tests of their own. Having admonished the courts to abandon their versions of Bonnette tests, the Fourth Circuit handed down a new, six-factor test of joint employer status for FLSA purposes, all geared toward determining whether two or more entities “are ‘not completely disassociated’ with respect to a worker’s employment.”

Six-factor test. The Fourth Circuit’s six factors are:

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 worker, 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 and duration 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.

This list is not exhaustive, the appeals court cautioned. “To the extent that facts not captured by these factors speak to the fundamental threshold question that must be resolved in every joint employment case—whether a purported joint employer shares or codetermines the essential terms and conditions of a worker’s employment—courts must consider those facts as well.” Again, the determination must consider “the circumstances of the whole activity.”

The essence of the test. The short-hand version: Joint employment exists “when (1) two or more persons or entities share, agree to allocate responsibility for, or otherwise codetermine—formally or informally, directly or indirectly—the essential terms and conditions of a worker’s employment and (2) the two entities’ combined influence over the essential terms and conditions of the worker’s employment render the worker an employee as opposed to an independent contractor.”

Rationale for new approach. The new test was better for several reasons, according to the appeals court. First, it is properly focused on the relationship between the putative joint employers and so can go where tests before it could not. For example, the old approaches can discern that two entities independently constitute a worker’s employers for purposes of the FLSA, but they can’t resolve whether the entities amount to joint employers such that the worker’s hours for both employers must be aggregated to determine compliance with the statute (an issue that surfaced in the case at hand). “Likewise, two entities that do not individually employ a worker within the meaning of the FLSA may still have to comply with the FLSA if their combined influence over the essential terms and conditions of the worker’s activities gives rise to an employer-employee relationship.” Bonnette and its ilk were ill-suited to resolve that scenario, too. Also, its new test was more inclusive than the old joint employment tests, broad enough to encompass the FLSA’s ample construct of “employee.” And, it nicely separates the joint employer inquiry from the separate independent contractor vs. employee analysis, which the other tests had muddied.

District court’s faulty criteria. As for the district court’s novel joint employer test, applied below, the court found it improperly focused on whether the relationship between the entities was traditionally recognized under the law, whether the relationship “represented a reasonable business decision,” or whether it “reflected a bad faith effort to avoid compliance with wage and hour laws.” None of these criteria should come into play when assessing whether the entities codetermine a worker’s terms and conditions of employment, in the appeals court’s view. “The fact that contracting out employment services represents a ‘reasonable business decision’ likewise has no bearing on whether two entities constitute joint employers and therefore must jointly comply with the FLSA’s wage and hour provisions,” it wrote. Moreover, joining other courts, it definitively rejected a joint employer criteria that turns on whether the entities purposely structured their relationship as a means of evading their obligations under the FLSA.

Applying the test. Applying its newly minted test to the undisputed facts at hand, the Fourth Circuit found, in contrast to the lower court, that the contractor and subcontractor defendants shared authority over and codetermined the key terms and conditions of the plaintiffs’ employment and thus were joint employers under the FLSA and Maryland law. It dismissed the contractor’s plea that doing so would strike “a fatal blow” to the “traditional” benefits of general contractor-subcontractor relationships and “will render every general contractor a joint employer of its subcontractor’s employees and thereby impose unreasonable financial burdens on general contractors.” Should a contractor wish to avoid liability for wage-hour violations, the appeals court advised, it could sufficiently disassociate itself from the other entity as far as setting workers’ terms and conditions of employment. Or it could simply avoid working with a “fly-by-night operator … or one who plans to spurn the FLSA.”

Turning to step two, the independent contractor inquiry: The district court had dismissed one of the entities but found the plaintiffs were employees, not independent contractors, of the other entity. Having found here that the other entity was a joint employer with that employer, the appeals court further found that the plaintiffs were employees, and not independent contractors, of both entities. Accordingly, they could aggregate the hours they worked for the two entities for purposes of determining overtime compliance, and the entities were jointly and severally liable for the wage-hour violations.

Source:: 4th Circuit adopts new FLSA joint employer test, finds general contractor, sub jointly liable for overtime

      

List your business in the premium web directory for free This website is listed under Human Resources Directory