Third Circuit Establishes Test for Determining “Joint Employer” Liability Under the FLSA
A recent Third Circuit decision, In re Enterprise Rent-A-Car Wage & Hour Employment Practices Litigation, addresses the circumstances under which a parent company will be liable under the Fair Labor Standards Act (“FLSA”) as a “joint employer” of employees of the parent’s subsidiaries. The Third Circuit’s opinion gives concrete guidance to employers confronted by the broad definition of “employer” set forth in the FLSA’s regulations, providing a standard for assessing joint employer liability. (The FLSA defines an employer as “any person acting directly or indirectly in the interest of an employer in relation to an employee.”) Although the standard announced by the Third Circuit is by no means a bright-line test, it does provide fair notice to employers of the factors that will determine joint employer status.
Former assistant managers of a number of Enterprise car rental locations commenced lawsuits in various federal courts alleging they had been misclassified as “exempt” employees under the FLSA and thus had been wrongfully deprived of overtime wages as mandated by the statute. Each of the car rental locations employing one or more of the former assistant managers was a wholly-owned subsidiary of Enterprise Holdings, Inc. These cases were eventually transferred by the Judicial Panel on Multidistrict Litigation to the United States District Court for the Western District of Pennsylvania. Thereafter, the parent company moved for summary judgment on the grounds that it was not a joint employer.
The District Court found that the Boards of Directors of Enterprise Holdings, the parent company, and each of its subsidiaries consisted of the same three people. Additionally, the parent company made available to each subsidiary a panoply of services, including business guidelines, employee benefit plans, rental reservation tools, insurance, technology, employee relocation services, legal services and various human resources services, such as job descriptions, best practices, compensation guides, training materials and standard performance review forms. These materials included recommendations for subsidiary employee salary ranges and whether these employees should be salaried or receive an hourly wage. In addition, the parent company recommended that the subsidiaries, other than the California subsidiaries, not pay overtime to their assistant managers. The District Court also found, however, that each subsidiary could elect to use any or all of these guidelines or services in its own discretion and that none were mandatory. Finally, the District Court found that Enterprise Holdings had no authority to hire, fire or discipline assistant managers or to promulgate work rules or assignments and did not maintain control over employee records. Based on all of these findings, the District Court granted Enterprise Holdings’ motion for summary judgment.
The Third Circuit’s Decision
The Third Circuit noted that the FLSA’s regulations provide for joint employer status when “the employers are not completely disassociated with respect to the employment of a particular employee and may be deemed to share control of the employee, directly or indirectly, by reason of the fact that one employer controls, is controlled by, or is under common control with the other employer.” Emphasizing that shared control should be determined by “economic reality” rather than by “technical concepts,” the Court concluded that joint employer status depended on evidence showing that the two employers “share or co-determine those matters governing essential terms and conditions of employment.” The Court ruled that the appropriate inquiry should be “does the alleged employer have: (1) authority to hire and fire employees; (2) authority to promulgate work rules and assignments, and set conditions of employment, including compensation, benefits, and hours; (3) day-to-day supervision, including employee discipline; and (4) control of employee records, including payroll, insurance, taxes, and the like.” The Court was careful to note that these factors were not an exhaustive list and that there might be other indicia of “significant control in any given case.”
In the case before it, the Third Circuit adopted the findings of the District Court that Enterprise Holdings had no authority to hire or fire assistant managers, to promulgate work rules or assignments, or to set compensation, benefits, schedules, or rates or methods of payment. Moreover, Enterprise Holdings was not involved in employee supervision or discipline, nor did it maintain control over employee records. The Court rejected the plaintiffs’ contention that the guidelines and manuals promulgated by Enterprise holdings to its subsidiaries evidenced the requisite control over the assistant managers, finding that these materials were no more than recommendations that the subsidiaries could follow or not in their discretion. The Court acknowledged that the issue of interlocking directorates raised by plaintiffs was a factor to be considered, but ruled that on balance this fact did not outweigh the other factors indicating that the parent company did not exercise shared control over the assistant managers. Accordingly, the Court affirmed the grant of summary judgment in favor of Enterprise Holdings.
The Third Circuit’s opinion provides useful guidance on the issue of joint employer liability, especially in the parent-subsidiary context. Although the Court noted that its list of relevant factors for assessing joint employer status was not exhaustive, an examination of those specific factors and the manner in which they were applied by the Court in the Enterprise case should allow companies in future cases to make reasoned assessments of their exposure as joint employers under the FLSA.
If you have any questions regarding joint employer status or any FLSA-related issues, please feel free to contact any of the attorneys in the Gibbons Employment & Labor Law Department.