Failure to communicate and/or understand the law can result in unanticipated liability. Both users and suppliers of contingent labor need to understand their duties and responsibilities, and need to communicate with each other clearly regarding which entity is responsible for what.
The federal law
The Fair Labor Standards Act requires most employers to pay overtime to nonexempt employees who work more than 40 hours in a given workweek. It is administered by the Department of Labor.
The starting principle under the FLSA is that unless workers are exempt, they get paid overtime. There are three main exemptions—sometimes called the “white collar” exemptions—from overtime liability. These exemptions are for executive, administrative and professional employees. Each exemption has its own test under the FLSA rules.
While being paid a salary is part of the test for exempt status, it is not enough. Even salaried employees must be paid overtime unless they meet other specific criteria. Three other exemptions are the “computer-related occupation,” “outside sales” and “highly compensated employees” exemptions. Again, each exemption has its own test in the FLSA rules.
The FLSA rules fully apply to contingent labor, and courts frequently find both a staffing firm and its client liable for overtime as joint employers of placed nonexempt contingent employees. If found to be jointly liable, all hours worked by the contingent worker at either the staffing firm or its client are combined for purposes of determining if the employee has worked more than 40 hours in a workweek.
Perhaps more significantly, joint liability means that each of the joint employers must comply with the FLSA. As a result, the employee could choose to sue both employers together or either employer individually for the entire amount of unpaid overtime.
Generally, the Department of Labor Wage and Hour Division looks at several factors to determine if a joint employment relationship exists. The factor that is most important to the contingent workforce is whether one employer is acting directly or indirectly in the interest of the other employer in relation to the employee.
Other factors include whether there is an arrangement between employers to share the employee’s services, whether the employers share control of the employee, and whether there is common ownership or management of the employers. The following cases illustrate how courts analyze employer liability for overtime in the joint employer context.
In Barfield v. New York City Health and Hospitals, a certified nursing assistant was directly employed and paid by three referral agencies, each of which arranged for her to work on a temporary basis at a single hospital. As a result, the nursing assistant sometimes worked at the hospital for a total of more than 40 hours per week, but no single referral agency ever directed her to work more than 40 hours. The nursing assistant sued the hospital and the issue became whether the hospital qualified as her joint employer with the referral agencies.
The U.S. Court of Appeals for the 2nd Circuit concluded that although the nursing assistant was employed by the three referral agencies, the totality of the circumstances demonstrated that the hospital so controlled her work that it qualified as her joint employer and, as a result, was liable under the FLSA for her overtime whenever she worked more than a total of 40 hours in a given week.
In reaching its conclusion, the court relied on its four-factor test to determine the “economic reality” of the putative employment relationship. Namely, the court considered whether the employer:
• Had the power to hire and fire employees;
• Supervised and controlled employee work schedules or conditions of employment;
• Determined the rate and method of payment;
• Maintained employment records.
In another case, Schultz v. Capital International Security, Inc., the U.S. Court of Appeals for the 4th Circuit concluded that Capital International Security, the supplier of a personal security detail to Prince Faisal bin Turki bin Nasser Al-Saud, a Saudi diplomat in Washington, was a joint employer of the security agents who made up the detail.
As a result, the court found that the employment arrangement was “one employment” for purposes of determining whether the security agents were employees or independent contractors under the FLSA.
Ultimately, the court held that the security agents were not independent contractors and that CIS was jointly and severally liable for the payment of any overtime required by the FLSA during the security agents’ employment.
In reaching its decision, the court noted that the agents performed work that simultaneously benefited both CIS and the prince. In addition, the prince and CIS were not completely disassociated with respect to the employment of the security agents, and both the prince and CIS shared control of the agents. The prince and CIS were involved in the hiring of the security agents, although the prince exercised a greater degree of authority.
CIS advertised for the agents and screened responses, which were given to the leader of the security detail who was on the CIS payroll. The leader of the detail reported to the prince’s personal secretary who interviewed selected applicants and had the final word on hiring. The prince’s personal secretary generally handled the security agents’ work schedules, compensation, discipline and terminations.
CIS, however, maintained the authority to discipline agents and change the terms of their employment. The prince and CIS shared responsibility for supplying equipment to the agents. Considering these facts, the court concluded that the prince and CIS were joint employers. Furthermore, as a matter of economic reality, the agents were dependent on the joint employers and therefore were not contractors in business for themselves, but rather employees who were covered by the FLSA.
These cases illustrate the need for staffing firms and their clients to communicate with one another regarding the hours worked by a contingent worker. Companies should regularly report the hours worked by contingent employees to the staffing firm that supplied them.
In addition, companies and their staffing suppliers should address in writing which entity is responsible for complying with the FLSA. Note, however, that an aggrieved employee will still be able to sue either employer for unpaid overtime, but clear language in a contract will help to minimize the litigation expense of sorting out liability.