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News & Knowledge

USA: She’s your employee, not mine! Why are we in this lawsuit?

3rd April 2017

Smith Moore Leatherwood LLP

The Fourth Circuit U.S. Court of Appeals has issued a new and important ruling on the concept of "joint employers"- when an employee can sue two different companies as if both are his employer. The court adopted an especially broad test that will expand potential liability for companies that might not think of themselves as employers. MSI's Georgia & South Carolina member Smith Moore Leatherwood LLP provides further information.

The Fourth Circuit case is particularly important for staffing agencies and their clients, franchisees and franchisors, contractors and subcontractors, and for affiliated entities of a corporate enterprise.

The Fourth Circuit case dealt with alleged violations of the Fair Labor Standards Act, where being joint employers means both entities are fully responsible for keeping track of an employee’s hours worked (and aggregating the hours worked for both entities), for overtime pay, and for correct classification of the employee as exempt/non-exempt. A mistake or failure by one of the two entities means the other entity is equally responsible under the law for any resulting liability.

The court’s new test focuses on the relationship between the companies more than on the relationship between the employee and either of the two companies. The court now asks: are the two companies “entirely independent” of each other or, instead, “not completely disassociated” with respect to the essential terms and conditions of the individual’s employment?

The court’s phrase “not completely disassociated” is rather awkward, but it essentially means that if the two companies have not fully separated the employment functions, they are maybe considered joint employers. The court identified six factors to consider with respect to two entities

  1. Do they jointly determine, share, or allocate the power to direct, control, or supervise the worker?
  2. Do they jointly determine, share, or allocate the power to hire or fire the worker or modify the terms or conditions of the worker’s employment?
  3. Do they jointly determine, share, or allocate responsibility over functions such as handling payroll; providing workers’ compensation insurance; paying payroll taxes; or providing the facilities, equipment, tools, or materials necessary to complete the work?
  4. Do they have a permanent and lasting relationship as corporate entities?
  5. Do they share common control, through shared management, a direct or indirect ownership interest of one by the other, or a common ownership of both by a third entity?
  6. Do they share any ownership or control over the premises where the work is performed?

The court did not rank these considerations or declare how much joint activity needs to exist before two entities will be joint employers. However, the court did say that two entities should be “entirely independent” and “completely disassociated” from each other, which means that having to answer “yes” to any of these six questions raises concerns about potential joint employment status.