Third Circuit Clarifies Test for Joint Employer Status under FLSA

On June 28 the U.S. Court of Appeals for the Third Circuit refined the standard for deciding whether an organization is a joint employer under the Fair Labor Standards Act (“FLSA”) for purposes of liability for unpaid minimum and overtime wages owed another entity’s employees.

This issue arose in a collective action suit by assistant branch managers at Enterprise Rent-A-Car locations who claimed they were denied overtime pay in violation of the FLSA. Both the subsidiary company Enterprise Rent-A-Car and the parent company Enterprise Holdings, Inc. were named defendants. The District Court granted Enterprise Holdings’ motion for summary judgment on the basis that Enterprise Holdings did not qualify as a joint employer, and the Third Circuit affirmed.

In determining whether a company is a joint employer for purposes of FLSA liability, the Third Circuit articulated a four-prong, “economic reality” test. The Court stated it would require proof of significant control, instead of ultimate control, by one entity over another’s employees and “even indirect control may be sufficient.” The test is as follows:
1) Does the entity have authority to hire and fire?
2) Does the entity have authority to promulgate work rules and assignments, and set conditions of employment, including compensation, benefits and hours?
3) Does the entity conduct day-to-day supervision, including employee discipline?
4) Does the entity control employee records, including payroll, insurance, taxes?

The plaintiffs argued that Enterprise Holdings was a joint employer because it provided its Rent-A-Car branches with human resources best practices guides, employee benefit plans and compensation recommendations, constituting sufficient control under the four prong test for joint employer. The Third Circuit disagreed and found controlling the facts that the subsidiary branch offices were free to choose whether to use any or all of the parent’s suggested guidelines at their own discretion and none of the parent’s guidelines was mandatory. The Court also stressed that the four factors were by no means an exhaustive list and should not be blindly applied. Instead, according to the Court, they should be evaluated in light of other relevant factors that show the first entity is exerting significant control over the other entity’s employees, such as interlocking directorates and the common nature of the businesses each conducted.

Joint employer status under the FLSA continues to require a fact-specific analysis consistent with the Third Circuit’s guidance. If your organization needs assistance in reviewing potential joint employer issues, please contact Jim McGovern, Pat McGovern or Doug Solomon in our Labor Law Practice Group.