The U.S. Department of Labor (DOL) has proposed a new rule clarifying when two or more entities may be considered joint employers under three different federal statutes, including the Fair Labor Standards Act (FLSA). The proposal signals a renewed focus on how business relationships can drive wage and hour liability.
Although framed as a clarification, the proposal highlights meaningful risk for organizations that rely on franchises, subcontractors, staffing firms, or affiliated entities to do business or deliver services. At the same time, it presents opportunities for employers to reassess how their operational practices align with both their legal strategy and their insurance protections before enforcement and litigation activity accelerates.
An evolving regulatory landscape
Last month, the DOL put forward a new proposal (opens a new window) aimed at clarifying when two or more entities may be considered a “joint employer” under the FLSA, Family and Medical Leave Act, and Migrant and Seasonal Agricultural Worker Protection Act. Joint employment has long been relevant to various workplace laws, but the applicable standard has shifted repeatedly over the past decade, largely in response to changing presidential administrations and court challenges. The current proposal reflects an effort to restore clarity after years of shifting standards.
The modern debate over joint employment began in 2015, during the Obama administration, following a National Labor Relations Board (NLRB) decision that dramatically expanded the scope of joint employer liability. Under the standard the NLRB established in Browning-Ferris Industries of California, an entity could be deemed a joint employer not only based on an employer’s actual control over workers, but also on the mere existence of contractual rights to control — regardless of whether those rights were exercised. This interpretation potentially exposed franchisors, parent companies, investors, and other upstream or affiliated entities to employment liability and triggered significant concern within the business community.
In 2020, the first Trump administration finalized a rule that narrowed the Browning-Ferris standard, emphasizing direct and exercised control over essential terms of employment. That rule was intended to provide employers with a clearer, more predictable framework. Unsurprisingly, it was quickly challenged by a coalition of state attorneys general and ultimately vacated by a federal court. The Biden administration subsequently rescinded the rule altogether, returning joint employment analysis largely to a patchwork of case law and enforcement discretion.
The latest DOL proposal revisits many elements of the 2020 rule while incorporating revisions intended to address the criticisms that led to its downfall. Although it does not represent a fundamental departure from prior approaches, it seeks to codify a clearer, more structured test for determining joint employer status by distinguishing between the two different forms of joint employment:
Vertical joint employment, which typically entails work for a primary employer that also benefits a higher entity in the business structure.
Horizonal joint employment, which involves an individual who works separate hours for two different yet sufficiently associated employers.
Certain factors used in determining independent contractor status (opens a new window) — such as the opportunity for profit or loss or the level of specialized skill required — have been deemphasized or removed. Instead, the focus remains on the degree of control exercised over wages, scheduling, supervision, and working conditions.
What’s at stake for employers
The proposed joint employer rule underscores how business relationships can create legal liability under federal employment laws. Although the rule does not dramatically expand the definition of joint employment beyond previous iterations, it clarifies the circumstances under which more than one entity may be jointly and severally liable for violations of the FLSA and other laws.
A central implication is that organizations may face liability even when they do not view themselves as the primary employer, or an employer at all. Entities that exercise meaningful control — such as setting work schedules, supervising job performance, influencing pay practices, or enforcing workplace policies — may be deemed joint employers. With an emphasis on actual as well as reserved control, and the inclusion of indirect forms of control in the analysis, the new rule exposes businesses with even limited involvement in employment decisions to joint and several liability for wage and hour violations.
The rule also underscores that joint employment can extend beyond franchise models. Parent-subsidiary structures, common ownership arrangements, and the use of subcontractors or staffing relationships can all give rise to exposure.
Expanded litigation risk
The proposal does not dramatically worsen employment risk. Still, employers should expect the new rule, if ultimately enacted, to bring renewed interest to joint employment-related matters from the plaintiffs’ bar. Plaintiffs’ attorneys may be emboldened to pursue additional defendants, especially those with deeper pockets, in wage and hour and related employment claims.
Beyond a joint employment angle, wage and hour claims are attractive to the plaintiffs’ bar because they are relatively straightforward and scalable — often turning on objective calculations rather than the subjective factors plaintiffs must demonstrate to prevail in discrimination and harassment claims — and can quickly compound in value. The wage and hour plaintiffs’ bar has historically pursued aggressive client solicitation and advertising strategies, and will likely see the new DOL rule, if enacted, as a renewed opportunity for growth.
Organizations that utilize staffing, subcontracting, and franchising models should work with in-house and outside counsel to evaluate whether these business arrangements could give rise to joint employer liability. This includes reviewing franchise relationships, parent-subsidiary or investor involvement, shared ownership structures, and contractor or subcontractor agreements.
Organizations should also consider reassessing existing business and workforce arrangements. Particularly, employers should review how much control they exercise over workers in practice — not just on paper — and ensure their operational reality aligns with their intentions.
Revisiting insurance buying decisions
Because the proposed DOL rule could pull additional entities into wage and hour litigation, now is an opportune time for employers to review their insurance programs. Wage and hour insurance — which responds to allegations such as unpaid overtime, minimum wage violations, and employee misclassification — is the most relevant coverage for claims involving joint employer liability.
Even so, employment practices liability (EPL) coverage may come into play if joint employment theories are used to name additional entities as defendants in discrimination, retaliation, or other employment-related claims. Plaintiffs are increasingly using joint employer and related concepts to pursue broader legal theories and those with deeper pockets, even when the alleged misconduct was caused by another party.
It’s important to note that insurance coverage does not automatically extend to all joint employer situations, and there are often significant underwriting considerations. For example, wage and hour applicability depends heavily on how the coverage is purchased. When purchased as part of an EPL policy, the scope is typically limited to defense costs only up to a sublimit, and applies solely to claims brought by employees of the named insured. Conversely, “full” coverage of defense costs and indemnity is available in stand-alone wage and hour policies.
EPL coverage, meanwhile, is typically conditioned on a claim being asserted by an employee or someone in a similar work-related or volunteer capacity. Joint employer allegations can create uncertainty around applicability — especially where affiliated or contractual entities are not included as insureds. Employers should consult with their insurance broker to understand how existing wage and hour and EPL policies may respond to potential joint employer claims.
As most employers opt not to purchase wage and hour insurance, the DOL’s proposal is an opportune time for those in more likely impacted sectors to reconsider that choice. A discussion with an experienced insurance broker will reveal whether an organization’s specific risk profile and legal exposure warrant giving wage and hour coverage a closer look.
For more information, visit our Employment Practice Liability page here (opens a new window), or contact a member of your Lockton Professional & Executive Risk team.
