Labor: The 3rd Circuit adopts a joint employer test to determine FLSA liability

The court’s distinction between recommendation and control allows significant involvement in subsidiaries’ affairs

In a case of first impression (In re Enterprise Rent-A-Car Wage & Hour Employment Practice Litigation), the 3rd Circuit provided employers, particularly parent entities, some much-needed guidance regarding joint employment relationships under the Fair Labor Standards Act (FLSA). The court adopted a revised version of a test created by the 9th Circuit (which the 1st and 2nd Circuits adopted) to address the joint employment issue.  According to the Enterprise test, the focal point of the joint employment analysis under the FLSA is the alleged ability of the employer to control, either directly or indirectly, the employees of another entity.

Enterprise Holdings, Inc. wholly owns 38 car rental subsidiaries throughout the U.S. Several assistant branch managers employed by the subsidiaries filed collective action lawsuits across the country claiming that their respective employers failed to pay them overtime wages in violation of the FLSA by misclassifying them as exempt. The plaintiffs sought national class certification and included Enterprise as a defendant.

In the district court, Enterprise moved for summary judgment on the consolidated cases, arguing that it did not employ the plaintiffs. The district court granted summary judgment in Enterprise’s favor, despite finding that Enterprise supplied the subsidiaries significant administrative services and support.

For example, Enterprise provided the subsidiaries “business guidelines, employee benefit plans, rental reservation tools, a central customer contact service, insurance, technology and legal services.” In exchange for using these services, the subsidiaries would pay dividends and management fees to Enterprise.

Further, each of the subsidiaries had an identical board of directors, with the same three individuals serving on each board. These three individuals also served on the Enterprise board of directors.

More importantly, Enterprise’s human resources department provided services to the subsidiaries. In addition to negotiating health plans offered to the subsidiaries’ employees, assisting with employee relocations and maintaining a list of open positions at any of the subsidiaries, Enterprise provided the subsidiaries “job descriptions, best practices and compensation guides.”

The latter two services made recommendations regarding which employees of the subsidiaries should be salaried and which should be hourly. Enterprise also recommended salary ranges for the subsidiaries’ employees, and, in 2005, Enterprise “‘recommended’ that the subsidiaries not pay overtime wages to ... ‘Assistant Branch Managers.’ ”

The district court held that Enterprise did not jointly employ the plaintiffs because “each individual subsidiary can choose to use any or all of these guidelines or services in its own discretion; none of these guidelines or services are mandatory.”

On appeal, the 3rd Circuit agreed. This court concluded that “where 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.” Ultimately, to determine whether a potential joint employment relationship exists, courts must consider:

  1. The alleged employer’s authority to hire and fire the relevant employees
  2. The alleged employer’s authority to promulgate work rules and assignments and to set the employees’ conditions of employment: compensation, benefits and work schedules, including the rate and method of payment
  3. The alleged employer’s involvement in day-to-day employee supervision, including employee discipline
  4. The alleged employer’s actual control of employee records, such as payroll, insurance or taxes

These factors are not exhaustive, and courts must consider, in addition to these factors, the effect of “other indicia” of significant control.

The court of appeals affirmed the district court’s grant of summary judgment in Enterprise’s favor because Enterprise did not exercise any control, directly or indirectly, over the subsidiaries, despite its heavy involvement in making “recommendations” and the board of directors overlap. Because the subsidiaries’ adoption of Enterprise’s suggested policies “was entirely discretionary,” the court compared Enterprise’s involvement to that of a “third-party consultant who made suggestions for improvements to the subsidiaries’ business practices.”

Although this case serves as a relatively extreme example of involvement by a parent entity with its wholly-owned subsidiaries, it provides parent entities—at least those in the 3rd Circuit (Pennsylvania, New Jersey and Delaware) —significant leeway to meddle in the affairs of their subsidiaries without incurring liability under the FLSA. To the extent that a parent entity currently requires its subsidiaries to adopt certain employment policies or practices, it is worth revisiting such requirements if the parent wishes to avoid FLSA liability.


Contributing Author

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Christine McLaughlin

Christine Liu McLaughlin is a shareholder in Godfrey & Kahn, S.C.'s Labor & Employment Law Practice Group in the Milwaukee office and is chair of the firm's...

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Contributing Author

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Rufino Gaytán

Rufino Gaytán is an associate in Godfrey & Kahn, S.C.'s Labor & Employment Law Practice Group in the Milwaukee office. Rufino assists private and public employers in addressing...

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