Joint Employment, PEOs & the Fair Labor Standards Act

What does an FLSA case against a Saudi Prince have to do with overtime pay risks for PEOs? Surprisingly enough, quite a lot. The federal court of appeals for the Fourth Circuit recently decided an FLSA unpaid overtime case on the basis of joint employment. Schultz et al v. Capital International Security, 4th Circuit, 2006.

The plaintiffs were five bodyguards employed through a security company that had the contract to supply personal protection to a Saudi Prince. The plaintiffs worked 12 hours shifts at the Prince's residence, but were paid a flat salary with no overtime. The bodyguards worked for several different security companies that held successive contracts to provide a security detail for the Prince.

Ultimately, the Prince fired the security company and one of the Prince's employees set up a new security company (Capital International Security) to provide the security detail. Capital International Security exercised little to no supervision over the bodyguards, for example the Prince's personal staff replaced personnel without consulting Capital International Security. The Prince's personnel staff also handled such details as scheduling, compensation, discipline, and termination of the bodyguards. Capital International Security had little involvement in these matters. Although Capital International Security provided the bodyguards with some equipment, the Prince provided cars, cellphones, cameras and office supplies.

At one point Capital International Security made a half-hearted attempt to convert bodyguards from employees into independent contractors. The Fourth Circuit had no trouble seeing past the ruse, and coming to the obvious conclusion that the bodyguards were truly employees.

From a PEO point of view the more interesting questions related to whether the bodyguards could only sue Capital International Security, the Prince or both. The Fourth Circuit began by quoting from the FLSA joint employment regulations "all joint employers are responsible, both individually and jointly, for compliance with all of the applicable provisions of" the Fair Labor Standards Act. See, 29 C.F.R. 791.2(a). In addition, joint employment must be determined by taking "into account the real economic relationship between the employer who uses and benefits from the services of the workers and the party that hires or assigns the workers to that employer." The ultimate determination must be based upon the "circumstances of the whole activity." Given the regulations, the Court easily determined that the Prince and Capital International Security were joint employers of the bodyguards. The Court thus found that Capital International Security was jointly and severally liable for the unpaid overtime owed the Plaintiffs.

This case clearly suggests how a court might analyze an FLSA claim involving a PEO and its client company. Under the facts of this case, Capital International Security was functioning somewhat like a PEO, with the Prince as its client. As in a PEO arrangement, the Prince (i.e. Prince) effectively set the wage rates, controlled hiring/firing/discipline, established the rules governing the details of the work to be done, and supplied virtually all of the supplies and equipment needed by the workers.

The regulations make this determination by the Fourth Circuit easy:
If the facts establish that the employee is employed jointly by two or more employers, i.e. that employment by one employer is not completely disassociated from employment by the other employer(s), all of the employee's work for all of the joint employers during the workweek is considered as one employment for the purposes of the [FLSA].
29 C.F.R. 791(2)(a). Section 791.1(2)(b) gives additional examples of situations in which "a joint employment relationship will be considered to exist." For example, "where one employer is acting directly or indirectly in the interest of the other employer (or employers) in relation to the employee."

The Fourth Circuits opinion clearly shows how the Department of Labor or a private litigant could easily argue for PEO liability for wage & hour violations that were actually the fault of the client company.

As always, bear in mind that this article is a brief discussion of a complex issue. Treat this a magazine article, not as legal advice for a specific situation.