On June 28, the U.S. Court of Appeals for the Third Circuit provided guidance as to what test should be applied to assess potential joint employer liability under the Fair Labor Standards Act in In re Enterprise Rent-A-Car Wage and Hour Employment Practices Litigation , No. 11-2883, 2012 U.S. App. LEXIS 13229 (3d Cir. June 28, 2012). The Third Circuit’s decision provides a helpful roadmap to employers seeking to better position their organizations to avoid joint employer liability.

Plaintiff Nickolas Hickton filed a nationwide collective action alleging that Enterprise’s branch managers and assistant branch managers were misclassified as exempt employees under the FLSA. After several other cases from around the country were transferred and consolidated in the U.S. District Court for the Western District of Pennsylvania, the plaintiffs filed an amended complaint narrowing the scope of their claims, which were asserted on behalf of themselves and all other current and former assistant branch managers of Enterprise locations.

The lawsuits were filed against Enterprise Holdings Inc., as well as several of its wholly owned subsidiaries. The plaintiffs claimed that both Enterprise Holdings and its subsidiaries jointly employed them. While Enterprise Holdings does not directly rent or sell vehicles, it does make available various administrative services and support to its subsidiaries, including business guidelines, employee benefit plans, rental reservation tools, a central customer contact service, insurance, technology, legal services and human resources services. The human resources services offered by Enterprise Holdings included recommendations regarding which employees should be hourly and which should be salaried. Enterprise Holdings also provided templates for performance evaluations, training materials and recommended salary ranges for different positions. Employee health plans were offered to employees directly employed by each subsidiary through Enterprise Holdings, which billed each subsidiary for the benefits elected by their direct employees. In exchange for the services offered by Enterprise Holdings, each subsidiary pays corporate dividends and management fees to Enterprise Holdings. During all times relevant to the lawsuit, the board of directors of each subsidiary consisted of the same three individuals, who also served on the Enterprise Holdings board of directors as its chief executive officer, chief operating officer and chief financial officer.

Enterprise Holdings filed for summary judgment before the district court, arguing that it did not qualify as a joint employer of the plaintiffs. The district court found that the use of the services provided by Enterprise Holdings to its subsidiaries was optional, and the information provided by the human resources department of Enterprise Holdings was recommendations, rather than mandates. These recommendations included advice made at a meeting attended by representatives of Enterprise Holdings that the subsidiaries not pay overtime to assistant branch managers. The district court granted summary judgment to Enterprise Holdings, finding it did not qualify as an employer of the plaintiffs.

In its first decision weighing what it means to be a joint employer under the FLSA, the Third Circuit affirmed the decision of the district court. The Third Circuit articulated a functional approach moored in the economic reality of the relationship between employee and putative employer, and emphasized the “uniqueness of the FLSA,” which includes “the broadest definition [of employer] that has ever been included in any one act.” Borrowing from both its own case law developed in the context of the National Labor Relations Act, as well as from other courts of appeals, the Third Circuit created a four-factor test, which it emphasized “do[es] not constitute an exhaustive list of all potentially relevant facts,” to guide the analysis of whether an entity would qualify as a joint employer under the FLSA. The test looks to whether the alleged employer has:

(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 Third Circuit cautioned that this test not be “blindly applied” and that district courts should not be “confined” by “narrow legalistic definitions.” Rather, the ultimate focus of the analysis should be based on consideration of the totality of the circumstances, including “other indicia of ‘significant control’” that do not “fall neatly” within the four factors. Moreover, an entity is not required to have direct control in order to qualify as a joint employer under the FLSA.

In applying what the Third Circuit called the “Enterprise test,” the court recited and then rejected the arguments of the plaintiffs. First, the Third Circuit found that the record evidence simply did not show that Enterprise’s “recommendations were anything more than recommendations,” relying on the fact that the plaintiffs had produced no evidence that Enterprise’s actions amounted to “mandatory” directives. The Third Circuit also was “not impressed” by the plaintiffs’ attempted reliance on the interlocking directorates or the nature of the car rental business, relying on the comprehensive analysis of the district court.

Of significant note is the Third Circuit’s emphasis that “summary judgment may still be appropriate even if not all of the factors favor one party.” And while the Third Circuit acknowledged that Enterprise Holdings provided guidelines and manuals, which lends credence to the possibility that Enterprise Holdings may have influenced the terms and conditions of employment, ultimately the court likened the role of Enterprise Holdings to “a third-party consultant who made suggestions for improvements to the subsidiaries’ business practices,” rather than an employer.

After articulating its four-part test and analyzing the relevant factors, in the end the Third Circuit looked not only at how the facts in the case measured up against the factors, but how the preliminary conclusion created by the factors measured up against the functional relationship between Enterprise Holdings and each individual plaintiff. Finding it “readily apparent” that Enterprise Holdings “exercised no control, let alone significant control” over the assistant manager plaintiffs, the Third Circuit held that as a matter of law, Enterprise Holdings was not an employer of the plaintiffs under the FLSA.

The four-part test set forth by the Third Circuit in Enterprise provides helpful guideposts for employers seeking to minimize joint employer liability. It also provides solace to the myriad organizations with parent entities that make benefits and other services available to their subsidiaries, but lack functional control of the working relationship with their subsidiaries’ employees. The touchstone of the analysis is the permissive versus mandatory nature of the relationship, i.e., is it a recommendation or is it a directive? And, in order to be strongly positioned to defend against allegations of a joint employment relationship in litigation, are contemporaneous documents being created (and maintained) to illustrate that the policies are guidelines to be implemented in the discretion of the subsidiary rather than dictates to be applied upon decree of the parent entity?

The lessons of Enterprise are equally instructive to mitigate the risk of potential joint employer liability in other contexts. Employers that contract out certain functions or use temporary services agencies to provide workers on an as-needed basis must be vigilant to avoid any indicia of functional control over the employees of their contractors and must, to the maximum extent feasible, allow the contracting agency to supervise and set the terms and conditions under which the contractors’ employees perform their duties. While this is often easier said than done, it is essential for organizations to continuously evaluate the extent to which line managers are exercising any supervisory authority over a contractor’s employees.

Enterprise is illustrative of the central importance a joint employer argument can play in FLSA litigation. Enterprise Holdings was the glue that the plaintiffs looked to as a means of aggregating their claims against all of Enterprise Holdings’ subsidiaries in one proceeding (a multidistrict litigation). Plaintiffs counsel in FLSA litigation often name the perceived “umbrella” organization to amass as many plaintiffs into one case as possible. As a result, employers must proceed with caution, now armed with guidance from the Third Circuit to light their journey. •

Andrea M. Kirshenbaum is a principal in the Philadelphia office of Post & Schell and is part of the firm’s employment and employee relations law practice group. She can be contacted at akirshenbaum@postschell.com.