Third Circuit Explains Joint Employer Status Under FLSA as "Significant Control" over Essential Terms and Conditions of Employment

The Third Circuit recently clarified the test for joint employer status under the Fair Labor Standards Act in the context of a holding company providing shared services to its subsidiaries in In re: Enterprise Rent-a-Car Wage & Hour Employment Practices Litigation, 2012 U.S. App. LEXIS 13229 (3d Cir. June 28, 2012).

At all times relevant, Enterprise Holdings, Inc. was the parent company and sole stockholder of 38 domestic subsidiaries operating rental car agencies in different states. The same three individuals who were the holding company’s directors – the Chairman and CEO, the President and COO, and the Executive Vice President and CFO – were also the only Board members of each of the subsidiaries. The holding company provided shared services to its subsidiaries, which were optional in the discretion of the subsidiary and paid for via dividends and management fees. The shared services included: employee benefit plans, rental reservation tools, a central customer contact service, insurance, technology, legal services, business guidelines, and human resources services. The human resources services provided by the holding company included providing job descriptions, best practices, training materials, performance review forms, and compensation guidelines. There was evidence that during 2005, representatives of the holding company recommended that the subsidiaries not pay overtime wages to assistant managers who were employed by subsidiaries outside of California.

Plaintiff Nickolas Hickton, a former assistant manager at Enterprise Rent-a-Car Company of Pittsburgh, filed a nationwide collective action in the United States District Court for the Western District of Pennsylvania, alleging that he and others similarly situated were misclassified as exempt, and were due back wages for overtime, liquidated damages and attorneys’ fees under the FLSA. Hickton named both Enterprise Rent-a-Car Company of Pittsburgh and Enterprise Holdings, Inc. as defendants. By orders of the U.S. Judicial Panel on Multidistrict Litigation, similar actions pending in other federal courts were transferred to the Western District of Pennsylvania, and Hickton filed an amended master complaint, alleging that Enterprise Holdings was liable as a joint employer of the plaintiffs who worked for the various subsidiaries operating in different states.

The holding company moved for summary judgment on the ground that it was not a joint employer and thus not liable under the FLSA. The district court granted the motion and the Third Circuit affirmed on appeal. The Third Circuit first cited the governing statute, which defines “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee.” The court then noted that the regulations provide that an entity may be found to be a joint employer “[w]here 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.” The court then cited Third Circuit precedent holding that the degree of control over essential terms and conditions of employment is the touchstone for joint employer status:

“[W]here two or more employers exert significant control over the same employees – [whether] from the evidence it can be shown that they share or co-determine those matters governing essential terms and conditions of employment – they constitute ‘joint employers’ under the FLSA.”

The court held that the test for joint employment under the FLSA is broader than the test used under other statutes such as the Age Discrimination in Employment Act (ADEA) and Title VII because the FLSA provides for joint employment status where there is “indirect” as well as “direct” control over the relevant employees. Accordingly, the court set forth the Enterprise test for evaluating joint employer status under the FLSA: (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 stressed that these criteria are not exhaustive and should not be blindly applied, that there may be other indicia of “significant control,” and that the joint employer determination must be based on an assessment of the “economic realities of the work relationship.”

On the facts at issue, the court found that Enterprise Holdings did not meet elements (1), (2) or (3), and, as to element (4), it did not exercise or maintain any control over employee records. The court rejected the argument that the provision of guidelines and manuals rose to the level of “significant control,” reasoning that they were suggested policies and practices, the subsidiaries had the discretion as to whether to adopt them, and the holding company’s recommendations were akin to those of a third-party consultant. The court concluded that, based on the evidence, no reasonable juror could find that Enterprise Holdings exercised significant control over the assistant managers under the expanded test articulated by the court, and affirmed the district court’s decision.

Thus, under the Enterprise test, to reduce the likelihood of a finding of joint employer status, a holding company or parent company providing shared services to a subsidiary or affiliate should consider making the shared services optional and refrain from exercising significant control over the day-to-day operations of the subsidiary or affiliate.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.