By Michael Baer
Prior to the new proposal by the U.S. Labor Department to define joint employer status under the Fair Labor Standards Act (FLSA), two certainties existed: first, any new rule would lessen the burden on affiliated employers, and second, the approach would be resisted in federal courts.
This is because the proposed rule, published April 23 in the Federal Register, is mostly a carbon copy of the rule the previous Trump Administration finalized in 2020 that was partially struck down by a federal judge and was swept away and replaced after the Biden Administration took over.
The Proposal’s Two Aspects
The new guidance recognizes two types of joint employment: horizontal and vertical.
Horizontal joint employment generally occurs when two related companies (e.g., sister companies) share an employee. Employees eligible for overtime who work under a horizontal employment situation would have their hours worked at both related employers combined for determining whether overtime pay is owed. The Labor Department specifically clarifies that, in general, “business relationships which have little to do with the employment of specific employees—such as sharing a vendor or being franchisees of the same franchisor—are alone insufficient to establish joint employment.”
Vertical joint employment, at its simplest, can happen in situations where, say, a hospitality provider contracts with a smaller firm to perform services on property, such as housekeeping. These relationships have been seen as joint employment of workers, but the proposal lifts some key aspects of these relationships from being considered. Similarly, controversy has surrounded as well the issue of whether franchisee workers are also jointly employed in a vertical manner by their company’s franchisor.
For determining whether vertical joint employer situations exist, the Labor Department would examine whether the secondary entity:
- Hires or Fires: Does the secondary company have the actual authority to terminate?
- Supervises and Controls: Do they dictate schedules or conditions to a “substantial degree?"
- Determines Pay: Do they set the rate or method of payment?
- Maintains Records: Do they hold the employment files?
The proposal allows for additional factors to be relevant in assessing vertical joint employment, but that a unanimous finding on the four factors in either direction would establish a "substantial likelihood" regarding whether an individual or entity is a joint employer with another.
The proposed rule specifies that reserved right to control could matter, such as in cases where a secondary employer doesn’t actually terminate someone’s employment, but the contract says it can. That secondary employer could also be liable if there were violations in that process. However, the Labor Department said the proposal would make the reserved right to control “less indicative of vertical joint employment than exercised control.”
Not Defined by Law
It is important to note the issue of joint employment is not specifically defined in the FLSA. Thus, the interpretations as to who is and who isn’t a joint employer have been left primarily to common law instances settled by courts.
In the U.S., courts in different jurisdictions have, over the years, looked to agency interpretations, but also have devised their own tests to decide joint employer liabilities. Several prescribe an “economic realities” test that examines several factors of the working relationship, but some courts apply a different number of factors in their assessments.
Courts will likely be even less deferential to the agency’s interpretation of this issue in the wake of the U.S. Supreme Court’s ruling in Loper Bright Enterprises v. Raimondo. That case removed for federal courts a certain predisposed deference to the language of agency rulemaking.
The proposed rule, which also would apply to the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act, has a 60-day comment period that closes on June 22, 2026.
By Michael Baer
Prior to the new proposal by the U.S. Labor Department to define joint employer status under the Fair Labor Standards Act (FLSA), two certainties existed: first, any new rule would lessen the burden on affiliated employers, and second, the approach would be resisted in federal courts.
This is because the proposed rule, published April 23 in the Federal Register, is mostly a carbon copy of the rule the previous Trump Administration finalized in 2020 that was partially struck down by a federal judge and was swept away and replaced after the Biden Administration took over.
The Proposal’s Two Aspects
The new guidance recognizes two types of joint employment: horizontal and vertical.
Horizontal joint employment generally occurs when two related companies (e.g., sister companies) share an employee. Employees eligible for overtime who work under a horizontal employment situation would have their hours worked at both related employers combined for determining whether overtime pay is owed. The Labor Department specifically clarifies that, in general, “business relationships which have little to do with the employment of specific employees—such as sharing a vendor or being franchisees of the same franchisor—are alone insufficient to establish joint employment.”
Vertical joint employment, at its simplest, can happen in situations where, say, a hospitality provider contracts with a smaller firm to perform services on property, such as housekeeping. These relationships have been seen as joint employment of workers, but the proposal lifts some key aspects of these relationships from being considered. Similarly, controversy has surrounded as well the issue of whether franchisee workers are also jointly employed in a vertical manner by their company’s franchisor.
For determining whether vertical joint employer situations exist, the Labor Department would examine whether the secondary entity:
- Hires or Fires: Does the secondary company have the actual authority to terminate?
- Supervises and Controls: Do they dictate schedules or conditions to a “substantial degree?"
- Determines Pay: Do they set the rate or method of payment?
- Maintains Records: Do they hold the employment files?
The proposal allows for additional factors to be relevant in assessing vertical joint employment, but that a unanimous finding on the four factors in either direction would establish a "substantial likelihood" regarding whether an individual or entity is a joint employer with another.
The proposed rule specifies that reserved right to control could matter, such as in cases where a secondary employer doesn’t actually terminate someone’s employment, but the contract says it can. That secondary employer could also be liable if there were violations in that process. However, the Labor Department said the proposal would make the reserved right to control “less indicative of vertical joint employment than exercised control.”
Not Defined by Law
It is important to note the issue of joint employment is not specifically defined in the FLSA. Thus, the interpretations as to who is and who isn’t a joint employer have been left primarily to common law instances settled by courts.
In the U.S., courts in different jurisdictions have, over the years, looked to agency interpretations, but also have devised their own tests to decide joint employer liabilities. Several prescribe an “economic realities” test that examines several factors of the working relationship, but some courts apply a different number of factors in their assessments.
Courts will likely be even less deferential to the agency’s interpretation of this issue in the wake of the U.S. Supreme Court’s ruling in Loper Bright Enterprises v. Raimondo. That case removed for federal courts a certain predisposed deference to the language of agency rulemaking.
The proposed rule, which also would apply to the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act, has a 60-day comment period that closes on June 22, 2026.
