Certain companies that use subcontractors may have more employees than they thought, for purposes of the Fair Labor Standards Act of 1938 (“FLSA”), according to a recent decision in the U.S. Court of Appeals for the Second Circuit.  In Zheng v. Liberty Apparel Company, Inc., the Court held that garment assembly workers employed by a subcontractor of a clothing manufacturer could also be considered employees of the manufacturer and that the manufacturer could be liable for the subcontractor’s failure to pay its employees statutorily mandated wages.

The FLSA requires employers to pay employees a minimum wage and to pay time and a half when an employee works in excess of 40 hours per week.  The FLSA defines an “employee” as “any individual employed by an employer,” and broadly provides that an entity “employ[s]” an individual if it “suffer[s] or permit[s]” that individual to work.

In Zheng, the manufacturer was a producer of garments for various customers.  Rather than perform all production itself, the manufacturer subcontracted out the final phase of production to various assemblers.  The assemblers in turn employed workers, who were paid a piece rate for their work, to stitch and finish the garments.  According to the plaintiffs in Zheng, some of the manufacturer’s assemblers failed to pay their workers a minimum wage and overtime.  The plaintiffs brought suit under the FLSA and New York statutes against the assemblers, which by that time were no longer operating or could not be located.  The plaintiffs also, however, sued the manufacturer, claiming the manufacturer was liable to the employees for the wages the assemblers had failed to pay.

The manufacturer denied it was the plaintiffs’ employer, because the manufacturer did not:  (1) hire and fire the plaintiffs, (2) supervise and control their work schedules or conditions of employment; (3) determine the rate and method of their payment; or (4) maintain their employment records.  The district court agreed and dismissed the plaintiffs’ claims against the manufacturer.  The court of appeals, however, essentially said “not so fast” and held that factors other than the four listed above must be considered in determining whether the plaintiffs were employees of the manufacturer, as well as of the subcontractor.

The court determined that an entity can be considered an employer when it has “functional control” over workers, even if it lacks the formal control that would be evidenced by hiring or payment of wages.  Factors that may be considered in determining whether an employer is a “joint employer” of its subcontractor’s employees include:  (1) do the subcontractor’s employees work at the employer’s premises or use its equipment; (2) does the subcontractor have a business that could or does shift from one employer to another; (3) do the employees perform a discrete job on a production line that is integral to the employer’s production process; (4) could responsibility under contracts with the employer pass from one subcontractor to another without material change; (5) does the employer supervise the work of the subcontractor’s employees, other than with respect to contractual warranties of quality and time of delivery; and (6) do the subcontractor’s employees work exclusively or predominantly for the employer.

Issues of whether an employee is sufficiently within the control of a company to be considered its employee arise in other situations as well.  Recently, the New Jersey Supreme Court determined that a company was not vicariously liable for the alleged negligence of its employees at a job site at which the plaintiff was injured.  The Court in Galvao v. G.R. Robert Construction Company held the company, which acted as a general employer for the sole purpose of loaning employees to its parent, was not liable because although the company paid its employees’ salaries, it had no control over any of the employees on the job site where plaintiff’s injuries occurred and derived no benefit from the project.  The court noted, however, that joint liability could arise when a general and special employer both retain some control over a project and both stand to reap economic benefit from it.

Following the decision in Zheng, companies that use subcontractors should be concerned about exposure to claims by the subcontractor’s employees, even when they do not believe they exercise any functional or formal control over their subcontractor’s employees.  Defending against employees’ claims, even baseless ones, can be costly and distracting to an enterprise.  Companies using subcontractors, therefore, should consider including provisions in written subcontracts requiring the subcontractor to comply with specified statutes and indemnifying the company against claims by the subcontractor’s employees.