DOL Proposes ‘Other’ Rules After Overtime

Agency unveils four-factor test for joint employers and clarifies regular rate

While employers are reviewing their pay practices for the overtime overhaul that the U.S. Department of Labor recently revealed, the DOL has followed up with more major proposals. 

On Tuesday, the DOL published a proposed rule in the Federal Register that would install a more employer-friendly joint employer test. The new four-factor test would limit employers’ risk of getting drawn into wage-and-hour claims alongside franchisors, staffing agencies and other companies they contract with. The DOL also proposed a rule March 28 to modernize how employers should calculate overtime pay.

The DOL’s joint employer proposal comes after the National Labor Relations Board unveiled a similar standard back in September. The NLRB has yet to finalize its joint employer rule, and a federal appellate ruling in December complicated the issue when it upheld the Obama-era standard, which the new rule seeks to replace. 

The NLRB’s 2015 decision in Browning-Ferris Industries broadened the definition of joint employer to include an entity that merely reserved the right to control the terms and conditions of employment of another entity’s workers. Such a broad definition had the potential to label many franchisors joint employers with their franchises, or other companies to be jointly employing the workers their staffing agencies provide, and so on.

While the NLRB is concerned with unfair labor practices and other claims under the National Labor Relations Act, the DOL’s joint employer test would prove pivotal in Fair Labor Standards Act claims. A narrower DOL test would decrease the likelihood of employers getting pulled into wage-and-hour litigation alongside their subcontractors, franchisees and other adjacent entities.

Currently, the DOL may find that multiple independent employers may be joint employers if they are “not completely disassociated” regarding the employment of a worker who does work to benefit them simultaneously. The proposed four-factor test would determine that a joint employer relationship exists depending on whether the potential joint employer “actually exercises” the power to:

  • hire or fire the employee;
  • supervise and control the employee’s work schedules or conditions of employment;
  • determine the employee’s rate and method of payment; and
  • maintain the employee’s employment records.

The rule also notes that additional factors could come into play if they point to the entity asserting control over the terms and conditions of the employee’s work, or otherwise acting directly or indirectly in the interest of the employer in relation to the employee.

“I think it’s a positive development from the employer’s perspective,” according to Leni Plimpton, a management-side labor and employment attorney who is an associate at Fortis Law Partners in Denver. “It gives employers the freedom to enter some of these more modern agreements.”

Like similar DOL tests under the FLSA, the proposed joint employer test would have the agency and courts looking at the business relationship holistically. “The big takeaway is no one factor is absolutely controlling,” Plimpton said.

Under the proposed test, reserving the right to hire or fire another entity’s workers does not define a joint employer. But a company can still be a joint employer if it carries out those actions, even if the contract doesn’t stipulate those rights, Plimpton said.

In one example the proposed rule provides, a country club contracts with a landscaping company to maintain its golf course. While the contract doesn’t give the country club the right to hire or fire the landscapers or supervise their work, country club personnel nonetheless direct the workers to perform tasks each day and direct the contractor to fire a landscaper for failing to follow the country club’s policies. In that scenario, the country club would be considered a joint employer of the landscapers under the new test, according to the proposed rule.

Plimpton noted that like in the above example, the joint employer analysis can easily go one way or the other depending on a few key facts.

Less controversial, but also significant, is the proposal the DOL revealed on how employers should determine their workers’ regular rate of pay for calculating overtime. 

Employees entitled to overtime pay earn time-and-a-half their regular rate for hours worked overtime under the FLSA. But that regular rate isn’t straightforward for every non-exempt employee, particularly those that earn different rates for different shift types, and when bonuses or other payouts are involved.

The DOL noted in its proposed rule that many of the regular rate regulations haven’t seen an update in more than a half-century. Since then, employee compensation and benefits have widely encompassed more factors including paid sick leave and wellness benefits.

The FLSA defines the regular rate as “all remuneration for employment paid to, or on behalf of, the employee,” but Section 7(e)(2) of the statute lists several exceptions.

The proposed rule would make clear that payouts for unused paid leave, reimbursed expenses, discretionary bonuses, benefit plans and other perks may be excluded from an employee’s regular rate calculation. Payment for “bona fide” meal periods would also be excludable, according to the rule.

When employers pay out unused leave to their workers, the DOL won’t differentiate between types of leave — whether it’s vacation, sick pay, etc. — when determining whether the payouts should be excluded.

Plimpton noted that courts have for some time been interpreting these types of pay as excludable, but here the DOL is mostly modernizing the language of its regulations.

— Doug Chartier

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