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By Connie Elder Carrigan, Esq.
Smith Debnam Narron Drake Saintsing & Myers LLP
Raleigh, North Carolina

On June 7, 2017, the Wage and Hour Division of the United States Department of Labor withdrew two Administrator’s Interpretations issued during the Obama administration that took a broad view of the employment relationship under the Fair Labor Standards Act (FLSA) regarding joint employment and the misclassification of employees as independent contractors. Employers should not become complacent, however, as a result of this action. In withdrawing these guidance documents, the Department of Labor made it clear that it intends to continue to carefully scrutinize the employment relationship and that this action does not change the legal responsibilities of employers, as outlined in longstanding regulations and case law. Employers need to remain aware of potential liability associated with joint employment and misclassification of employees as contractors. This is particularly true in federal cases in the Fourth Circuit, which governs cases pending in North Carolina. A federal judge’s recent denial of an employer’s motion for summary judgment in the United States District Court for the District of South Carolina emphasizes this point.

On May 26, 2017, U.S. District Judge J. Michelle Childs, relying on the United States Fourth Circuit Court of Appeals case of Salinas v. Commercial Interiors, Inc., ruled that unless DirecTV can prove otherwise at a future summary judgment hearing, a factual dispute exists as to whether DirecTV, the satellite service provider, is a joint employer of service technicians which it claimed are employed by or are independent contractors of its home service provider, MasTec. On January 25, 2017, the Salinas court articulated a new standard for evaluating joint employer liability under the FLSA, holding that joint employment exists when:

  • Two or more persons or entities share, agree to allocate responsibility for, or otherwise codetermine – formally or informally, directly or indirectly – the essential terms and conditions of a worker’s employment; and
  • The two entities’ combined influence over the essential terms and conditions of the worker’s employment render the worker an employee as opposed to an independent contractor.

Judge Childs noted in her recitation of the evidence presented that DirecTV utilizes a computer program which it uses to assign work orders for time spent on tasks such as assembling satellite dishes, performing certain required customer education, working on previous installations that needed more work, and driving to job assignments. In declining to decide DirecTV’s motion for summary judgment on this issue until after a future hearing, Judge Childs noted that DirecTV arguably retained control over the essential terms and conditions of MasTec’s workers, which would make it a joint employer of the service technicians.

Judge Childs further held that DirecTV failed to prove that these service technicians are exempt from the FLSA’s overtime-wage requirement because, under the applicable tests, they do not work in a retail or service establishment. To qualify for exempt status, DirecTV needed to show by clear and convincing evidence that its technicians are subject to the retail or service establishment exemption for overtime established by the FLSA.

Although the FLSA does not define the term “retail or service establishment,” courts have traditionally used two tests to determine whether employees are employed in a retail or service establishment. Under the first test, a retail or service establishment is one in which at least 75% of its annual dollar volume of goods or services is not available for resale and which is recognized in its industry as offering retail sales or service. Under the second test, a service establishment is defined by its sensitivity to demand. When demand drops, the seller must demonstrate that it cannot make up for that drop in demand by producing for inventory rather than for immediate sale.

In attempting to establish the applicability of these tests, DirecTV relied only upon statements made by its supervisor of financial operations and by the deputy executive director of the Satellite Broadcast and Communications Association. The Court rejected this evidence, determining that industry alone cannot define what constitutes retail sales. Further, DirecTV failed to provide evidence about the nature of sales at the local establishment, as required by statute, or to provide evidence regarding MasTec’s ability to meet the retail and service establishment test for exemption from overtime compensation.

Key Considerations for Employers

The effect of holding entities jointly liable under the FLSA is that both employers are responsible for compliance with the wage and hour protections provided by the FLSA. Accordingly, a worker’s employment by joint employers is treated as “one employment” for purposes of compliance, including the aggregating of hours worked for each employer in order to determine whether and to what extent the worker is entitled to payment of overtime compensation.

It is evident that, despite the United States Department of Labor’s withdrawal of its Administrator’s Interpretations, joint employment remains an issue of paramount concern to federal courts and agencies in today’s flexible gig economy. While different tests have been applied by federal courts throughout the country and exhibit some inconsistencies in evaluating joint employment under the FLSA, Title VII, and other federal laws, the 4th Circuit’s approach expands the definition of joint employment under the FLSA. Given the 4th Circuit’s broad approach, as applied by the federal courts governed by the 4th Circuit, including North Carolina, employers would be wise not to rely upon traditionally recognized business relationships as suffici