Second Circuit Adopts Expansive Definition of "Joint Employers"

Companies outsource aspects of their business to increase efficiency, minimize costs, and maintain flexibility. While such relationships are appealing and, indeed, essential to many companies, they also present potential traps for the unwary. Under the Fair Labor Standards Act ("FLSA"), a company that satisfies the definition of a joint employer may be held liable for the wage and hour violations of its subcontractors. Liability for wage and hour violations may be imputed to a joint employer even if that employer does not participate in or have knowledge of the decision not to pay minimum wage and/or overtime. This can prove costly to employers since the FLSA provides for double damages and attorneys’ fees for successful plaintiffs.

The definition of what constitutes a joint employer under the FLSA historically has been unclear. In a recent decision, Zheng v. Liberty Apparel Company, the Second Circuit adopted an expansive definition of joint employer. In Zheng, plaintiffs were 26 garment workers who were directly employed by subcontractors. The defendant, Liberty Apparel Company, was a clothing manufacturing company that outsourced the stitching phase of its work to these subcontractors. Plaintiffs sued both the subcontractors and Liberty for failure to pay minimum wages and overtime in violation of the FLSA and New York state law. Because the subcontractors were no longer in business, the case proceeded against Liberty alone. Plaintiffs argued that Liberty was their joint employer and was therefore liable for the wage violations of its subcontractors. In support of their argument, plaintiffs claimed that 70% of the work they performed was for Liberty, that Liberty representatives came to the subcontractors’ factories several days a week to monitor and to inspect their work, and that these representatives often instructed them to work faster. Liberty countered that it did not exercise control over the workers, that they were not its employees, and that it did not meet the definition of a joint employer under the FLSA. Applying a four-factor test previously used to establish a joint employer relationship, the Federal District Court held that Liberty was not a joint employer under the FLSA because it did not (1) hire and fire the plaintiffs; (2) supervise and control their work schedule and conditions of employment; (3) determine the rate or method of their compensation; or (4) maintain their employment records.

On appeal, the U.S. Court of Appeals for the Second Circuit held that the District Court erred when it determined that Liberty was not a joint employer under this four-factor test. The Appeals Court commented that this test was unduly narrow because it focused solely on the formal right to control the physical performance of the employees’ work. The Court held that the FLSA’s broad definition of "employ," its remedial purpose, and Supreme Court precedent demand that courts look beyond an entity’s formal right to control employees in determining whether the company is a joint employer under the FLSA. While acknowledging that the "right to control" test is important, the court opined that this narrow test cannot be reconciled with the FLSA’s broad definition of what it means to employ someone. According to the Court, the FLSA definition of employ covers individuals who might not qualify as employees under strict agency principles.

The Second Circuit instructed that to determine whether an entity is a joint employer, courts must consider the circumstances of the whole activity, viewed in light of economic realities. Accordingly, the Second Circuit directed lower courts to consider any factor that they deem relevant to the assessment of economic realities. Offering some guidance, the Second Circuit noted six factors that courts might find helpful in this evaluation. The six factors are:

With respect to the third factor, the Court acknowledged that it could be construed to encompass every outsourcing or production line job. Recognizing the vital role of outsourcing and subcontracting in the American economy, the Court commented that it would resist the temptation to hold that every line job should attract the heightened scrutiny of the courts. Instead, the Court instructed that courts should consult industry custom and practice to discern whether the subcontracting relationship is likely to be a ploy for the contractor to circumvent wage and hour laws. The Court opined that the widespread and historic use of subcontracting relationships in an industry may indicate that the relationship has a strategic and legitimate economic purpose and is not merely a tactic to evade the requirements of the FLSA and state laws.

In the wake of the Zheng decision, companies that outsource aspects of their work are advised to closely examine their relationships with subcontractors paying particular attention to whether the subcontractors’ are in compliance with the FLSA and state wage and hour laws. While the precise impact of Zheng will depend on whether courts in other jurisdictions follow the Second Circuit’s line of reasoning, employers are advised to take necessary precautions to protect themselves from this increased exposure.

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