Third Circuit Court of Appeals Announces New “Total Employment Situation” Test to Determine if Parent Company is “Joint Employer” Under the FLSA

The Third Circuit Court of Appeals, in a case of first impression, has declared that it will now apply a broader “total employment situation” test to determine whether companies are “joint employers” for purposes of determining liability under the Fair Labor Standards Act (FLSA).

In In re: Enterprise Rent-A-Car Wage & Hour Employment Practices Litigation, Nicholas Hickton (“Hickton”), a former branch manager at Enterprise-Rent-a-Car Company of Pittsburgh, filed an FLSA collective action in the U.S. District Court for the Western District of Pennsylvania claiming that all Enterprise-Rent-a-Car Company of Pittsburgh branch managers and assistant branch managers had not been paid overtime wages. Hickton named as defendants both the local agency and its parent company and sole shareholder, Enterprise Holdings, Inc. The District Court ruled that Enterprise Holdings was not a “joint employer” and that, therefore, the plaintiffs could only sue the local Enterprise agencies for which they worked.

While the Third Circuit affirmed the District Court’s decision, it also ruled that the test applied to determine whether a parent company is a “joint employer” under the FLSA should be expanded. Under its new test, the Third Circuit ruled that courts evaluating whether a joint employment relationship exists should consider each company’s (1) authority to hire and fire the employees at issue; (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. However, the Court stressed that this list of factors is not exhaustive and that other indicia of a parent company’s “significant control” over its employees could be persuasive even if some of the factors listed above were not met. For example, the Third Circuit indicated that a parent company’s communications to its subsidiaries may create liability for the parent if those suggestions are “mandatory directions” instead of “mere recommendations.” The Court then went on to hold that a determination of joint employment status must be based on the “total employment situation” and the “economic realities” of the relationship.

This new standard is another reminder to companies with subsidiaries or joint ventures to carefully consider, if the goal is to avoid FLSA liability, the amount of direct or indirect control such companies retain over the employees of those subsidiaries and/or joint ventures. The more control that is exerted or retained over such employees by a company, the more difficulty that company will have in avoiding joint employer liability.

Joseph Tilson and Jeremy Glenn, Meckler Bulger Tilson Marick & Pearson LLP

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