FLSA Liability Issues and Influence Over the Employment Relationship

Shared or leased employees can create wage and hour obligations even where the sharing or leasing employer believes those employees are being properly paid. Increasingly, courts are looking at whether joint employer status exists under the Fair Labor Standards Act (“FLSA”). As part of this inquiry, courts may find that wage liability can potentially extend to anyone making key decisions regarding the economic realities of an employer-employee relationship – including not just corporate entities, but also potentially company officers or even board of directors members.

The Department of Labor regulations emphasize that a joint employment relationship generally exists where two or more employers appear to share an employee, act in the interests of each other in relation to the employee, or where multiple employers operate under the same common control. Most circuit courts have applied the following four-factor “Economic Reality Test”:

1. Does the employer, either directly or indirectly, have the power to hire, fire, discipline, or modify the employment conditions or workplace policies?
2. Does the employer have the ability to determine the employee’s compensation and method of payment?
3. Does the employer maintain employment records?
4. Does the employer, either directly or indirectly, supervise and control the employee’s work schedules or conditions of employment?

Despite the historical application of this analysis, courts are increasingly expanding their inquiries to include additional factors. In their analyses, no one factor is dispositive and each is highly fact specific. As a consequence, potential “secondary” employers and individuals who may influence the financial aspects of an employment relationship should consider whether any of the following situations exist:

1. Does the secondary employer share resources with the original employer, such as: – Premises and/or equipment used for the employee’s work? – The same time clock? – The same bookkeeper?
2. Can the original employer’s business seamlessly shift as a unit to the secondary employer and back?
3. Does the employee perform a specialty job integral to the secondary employer’s process of production?
4. Can responsibilities under contracts pass from the original employer to the secondary employer and back without material changes?
5. Does the employee work exclusively or predominantly for the secondary employer?
6. Does the secondary employer prepare payroll or partake in the payment of wages?
7. Do both the original and secondary employer have a shared business purpose, such as through one company’s revenue relating substantially to the work of the other company, so shared use of management or other employees?

The upshot is that courts are more and more taking a functional, common sense approach to assessing the economic realities surrounding the employer-employee relationship. As a result, employers that do not maintain their own exclusive workforce should consider auditing their relationships with shared or leased employees, making sure their exempt employees are properly classified, and double check their overtime calculations to safeguard against unexpected wage liability based on reliance over the management of an employment relationship by another person or entity.