The Second Circuit's New Test of Joint Employer Status Under the FLSA

The Fair Labor Standards Act ("FLSA" or the "Act"), 29 U.S.C. § 201 et seq., sets basic minimum wage and overtime pay standards. Although many companies have difficulty determining which of their employees are exempt under the Act, most employers do not have much trouble determining who are their employees for FLSA purposes.

In the typical situation, an individual is hired by a company, works only for that company, and is paid by that company. That company is the only entity liable for ensuring compliance with the FLSA.

In certain circumstances, however, another company might be a "joint employer" of a worker, equally responsible for compliance with the FLSA, even though that company did not hire the worker, does not dictate his hours, and does not pay him.

Although there is no bright-line rule as to when a company will be considered a joint employer for FLSA purposes, the United States Court of Appeals for the Second Circuit established a six factor test to be used in determining if a manufacturing company that subcontracts part of its production process is a joint employer of the employees of its subcontractors. See Zheng v. Liberty Apparel Co., No. 02-7826, 2003 U.S. App. LEXIS 26528 (2d Cir. Dec. 30, 2003).

According to the Second Circuit, the following factors should be used to determine if a company is a joint employer of an employee of a subcontractor:

1. Whether the company's premises and equipment are used for the employee's work;
2. Whether the subcontractor has a business that can or does shift as a unit from one putative joint employer to another;
3. The extent to which the employee performs a discrete line-job that is integral to the company's process of production;
4. Whether responsibility under a contract between the subcontractor and the company could pass from one subcontractor to another without material change;
5. The degree to which the company or its agents supervise the employee's work; and
6. Whether the employee works exclusively or predominantly for the company.

Factual Background of the Zheng Decision

The plaintiffs in the Zheng decision were piece-rate garment assemblers who worked in a Chinatown factory where six different contractors conducted business. The plaintiffs sued these contractors, their immediate employers, for FLSA and New York Labor Law violations because they failed to receive a minimum wage as well as overtime payments for time worked in excess of 40 hours a week.

Unfortunately for these plaintiffs, their immediate employers could not be located or had ceased doing business. Thus, the plaintiffs also sued Liberty Apparel Company ("Liberty" or the "Company"), the company that had contracted with their immediate employers, alleging that Liberty was their joint employer liable for violations of the Act.

Liberty is a manufacturing company that contracts out the last portion of its production process. The Company developed the garment patterns, cut the samples, and purchased and cut the fabric, and then delivered the cut fabric and essential materials to contractors for final assembly.

Liberty employed individuals to monitor the garments during assembly by the contractors, but the extent of the monitoring was disputed by the parties. The plaintiffs claimed that Liberty representatives visited their factory two to four times a week for up to three hours at a time, inspected their work, specifically instructed them on corrections, and exhorted them to work faster. Liberty argued that their quality control personnel made brief visits to the contractors' factory and were instructed only to speak to an owner of the contractors.

The parties also disputed what percentage of the plaintiffs' total work was on Liberty garments; the plaintiffs claimed that 70-75% of their work was for Liberty, while Liberty argued that the number was closer to 10-15%.

Statutory Definitions and Second Circuit Precedent

The language of the FLSA itself gives little guidance to employers. The Act defines "employee" as "any individual employed by an employer" and "employ" as "to suffer or permit to work. 29 U.S.C. §§ 203(e)(1) & 203(g).

The Supreme Court has established that a company suffers or permits a person to work if that company functions as the person's employer as a matter of "economic reality." See Goldberg v. Whitaker House Coop, Inc., 366 U.S. 28, 33 (1961).

In the joint employer context, federal regulations promulgated under the FLSA clarify that a worker may be employed by more than one employer at the same time. See 29 C.F.R. § 791.2.

Pre-Zheng: Two Different Tests

Prior to the Zheng decision, the Second Circuit had previously applied two different tests to determine if an individual is in an employment relationship with a company for FLSA purposes in light of the economic reality test. In 1984 and again in 1999, to determine if an entity was an individual's employer under the FLSA, the Second Circuit evaluated whether that entity:

1. Had the power to hire and fire the plaintiffs;
2. Supervised and controlled the plaintiffs' work schedules or conditions of employment;
3. Determined the rate and method of payment; and
4. Maintained employment records.

See Carter v. Dutchess Community College, 735 F.2d 8 (2d Cir. 1984); Herman v. RSR Security Services Ltd., 172 F.3d 132 (2d Cir. 1999). However, after the Carter decision but prior to the Herman decision, the Second Circuit, in determining whether a worker was an employee or an independent contractor, examined:

1. the degree of control exercised by the company over the workers;
2. the workers' opportunity for profit or loss and their investment in the business;
3. the degree of skill and independent initiative required to perform the work;
4. the permanence or duration of the working relationship; and
5. the extent to which the work is an integral part of the company's business.

Brock v. Superior Care, Inc., 840 F.2d 1054 (2d Cir. 1988). The Zheng court ultimately decided that neither of these tests was adequate.

The Second Circuit's Analysis in the Zheng Decision

The Second Circuit noted that it had developed two competing economic realities tests: the four-factor Carter test, used mostly for joint employer situations, and the five-factor Brock test, generally used in independent contractor cases. Despite the distinction in application of the two tests, the court noted that it had never held that the Carter factors alone are relevant to joint employer cases.

Although a positive finding on the four Carter factors may be sufficient to establish employer status, they are not necessary. Therefore, instead of holding that the lower court correctly applied the Carter test, the Second Circuit pieced together a new test based on Rutherford v. Food Corp. v. McComb, 331 U.S. 722 (1947)

In the Rutherford decision, the Supreme Court held that a slaughterhouse on whose premises workers de-boned meat was a joint employer even though the slaughterhouse entered into a contract with a boning supervisor who directly controlled the terms of the workers employment.

Based on these facts, the Second Circuit concluded that the definition of "employ" could not be limited to formal control over the physical performance of another's work. Accordingly, the six-factors are relevant to the court because when they weigh in a plaintiff's favor, they show that the purported employer has functional control over the workers despite a lack of the formal control measured by the Carter test.

The Second Circuit noted that its test was designed to ensure that companies do not utilize outsourcing schemes that lack a substantial economic purpose to avoid the FLSA, but should not bring normal contracting arrangements within the realm of the Act.

Ultimately, however, the Second Circuit decided not to rule of the merits of the case, instead remanding to the lower court for application of the six factors.

Conclusion

The Zheng decision gives employers who outsource work some guidance in determining if they are responsible for FLSA compliance with regard to the employees of their contractors. However, the new six-factor test is far from a bright-line rule, and its application may be difficult on a case-by-case basis.

In addition, although the Zheng test should govern similar future cases, the Second Circuit's opinion does not close the door to additional modifications to the test or consideration of additional factors.

Thus, employers who contract out work are well-advised to seek legal counsel if there is any possibility that their contractors are not in compliance with the FLSA.