The U.S. Department of Labor (DOL) has proposed a significant new rule that could reshape how businesses are held liable for workers they do not directly employ — with major implications for staffing agencies, franchises, and companies that use subcontractors.
At the center of the proposal is the concept of “joint employer liability” — an issue that frequently arises in industries that rely on staffing agencies, subcontractors, or franchise arrangements. The goal of the rule is to clarify when more than one company may share responsibility for complying with federal wage-and-hour laws.
In simple terms, a joint employer relationship exists when a worker is formally employed by one entity, but another business also plays a meaningful role in how that individual works. When both entities qualify as joint employers, each can be held legally responsible for obligations such as minimum wage, overtime pay, and proper recordkeeping.
This area of law has long lacked consistency. Courts across the country have applied varying legal tests, and the Department of Labor itself has shifted its position over time. The current proposal is intended to create a more uniform and predictable framework for both employers and workers.
What Is the DOL’s Joint Employer Test? The Core Legal Standard
At the heart of the proposed rule is a practical, fact-driven inquiry: whether a second company exercises — or has the authority to exercise — significant control over essential terms and conditions of employment.
To guide this analysis, the Department identifies four primary considerations:
- Authority over hiring and firing – Whether the company can make or strongly influence decisions about bringing on or terminating a worker
- Supervision and direction of work – Whether it manages day-to-day activities, schedules, or job performance
- Influence over compensation – Whether it determines or meaningfully affects pay rates, benefits, or pay structures
- Control of employment records – Whether it maintains personnel files, payroll data, or similar documentation
No single factor is determinative. Instead, all relevant facts are evaluated together under a “totality of the circumstances” approach.
Actual Control vs. Potential Control: A Critical Distinction for Employers
A key feature of the proposal is how it distinguishes between different types of control. The rule makes clear that both actually exercised control and the authority to control may be relevant. However, it places greater emphasis on what a company does day-to-day rather than what it could do under a contract. Put simply: a favorable contract will not protect a company whose operational behavior looks like that of an employer.
For HR professionals and business leaders, this distinction is critical. Written agreements alone will not insulate a company from liability if day-to-day operations suggest a higher level of involvement.
Vertical vs. Horizontal Joint Employment: Common Structures Covered
The proposal addresses two common joint employment scenarios:
- Vertical relationships, such as when a staffing agency supplies workers to another business that directs their work
- Horizontal relationships, where an employee works for two related entities, often with shared ownership or management
Recognizing these structures helps clarify how the rule applies across different business models.
What Does NOT Create Joint Employer Status Under the Proposed Rule?
Equally important, the Department attempts to define what falls outside the scope of joint employer liability. According to the proposal, certain activities — on their own — generally should not trigger joint employer status:
- Imposing brand or quality standards on franchisees or contractors
- Conducting basic oversight to ensure legal or safety compliance
- Setting contractual expectations without becoming involved in daily operations
- Providing optional guidance, training, or best practices without direct enforcement
These distinctions are particularly relevant for franchise systems and companies that rely heavily on third-party labor, where the line between oversight and control can be difficult to manage.
Joint Employer Compliance: Practical Steps for Businesses
From a compliance standpoint, the proposal reinforces several important principles:
- Reviewing contracts is necessary, but not sufficient — the DOL will look at actual practices, which carry more weight
- Direct supervision of another company’s workers increases legal risk
- Involvement in compensation decisions should be carefully managed
- Frontline managers should be trained to understand the boundaries of appropriate oversight
In many cases, joint employer exposure arises not from formal policy, but from everyday operational behavior.
What Happens Next: Timeline, Legal Challenges, and What to Expect
Even if finalized, the rule is unlikely to settle the issue entirely. Courts are not bound to adopt the Department of Labor’s interpretation, and legal challenges are expected. As a result, the ultimate impact will depend on how the rule is applied in future litigation.
Overall, the proposal reflects an effort to strike a middle ground — offering businesses clearer rules while maintaining accountability where a company plays a meaningful role in employment decisions. For employers, the takeaway is straightforward: under this proposed rule, the closer your involvement resembles that of an employer, the more likely the law will treat you as one.
Concerned About Joint Employer Exposure?
The DOL’s proposed joint employer rule introduces meaningful compliance risk for businesses across industries — from franchisors to companies relying on staffing firms and subcontractors. Whether you need to assess your current exposure, revise vendor contracts, or train your management team, KJK’s Labor & Employment attorneys are ready to help. Contact J. David Campbell (JDC@kjk.com) or Mike Schlonsky (MAS@kjk.com).