Joint Employer Liability and Compensation Compliance: Businesses Need to Watch Pay Practices Closely

This article is part of an ongoing legal series designed to provide insight and practical guidance on current and emerging workplace compliance issues. These insights shared by lawyers are based on their interpretation of existing regulations and proposed changes, and intended for informational purposes, not to be regarded as legal advice.

On April 23, 2026, the Wage and Hour Division (WHD), an agency within the Department of Labor (DOL), proposed a regulation related to joint employment. Joint employment creates joint liability, allowing an employee harmed by one employer to recover damages against another. The joint employer rule provides a test to help determine whether multiple employers are jointly liable for the same employees.

While the proposal clarifies the rule, it does not change the responsibilities employers have to ensure they comply with joint employer regulations. Employers that share an employment relationship over an employee still need to maintain careful compliance with state and federal employment laws, including wage-and-hour requirements, compensation practices, and recordkeeping obligations. Understanding how compensation decisions are made and documented remains an important part of managing joint employer risk.

Outsolve offers assistance to employers looking to stay up to date on legal changes and ensure compliance with the law.

What Is the Joint Employer Rule and Who Does It Apply to?

In some cases, two or more legally separate entities share an employment relationship with the same person. When that occurs, employers may be jointly responsible for ensuring compliance with local, state, and federal laws.

Briefly, the WHD requires interrelated employers to coordinate their compensation and benefits practices for employees with overlapping employment. Yet there has historically been no nationwide standard for determining whether employment is joint. Employers typically rely on court cases to argue for or against joint employment. Relying on court cases means the law varies slightly depending on where the employer is located.

When Is Employment Joint?

Employers can be jointly liable through vertical or horizontal joint employment. Vertical employment involves employers who jointly benefit from an employee’s work, such as:

• General contractors, subcontractors, and employees;
• Staffing agencies, the agency’s clients, and employees; and
• Manufacturers, vendors, suppliers, and employees.

Horizontal joint employment involves employers who have a sufficiently strong association with one another and a shared employee whose work benefits both. An employee works hours specific to each employer in a horizontal joint employment arrangement. One example the DOL offers is a security guard for a building. Each business in the building may jointly employ the guard.

Whether employers jointly employ anyone vertically or horizontally depends on the totality of the circumstances. That means judges consider every fact that might suggest joint employment, every fact that might suggest otherwise, and weigh them against each other to determine whether employers are jointly liable for employees.

What Does Joint Liability Mean?

Because of their interrelationships, the law requires joint employers to coordinate certain employment obligations. Joint employers must, for example, aggregate the time an employee works for each of them to determine when overtime pay is required and coordinate tax withholding.

In the context of the joint employer rule, joint liability means every employer is collectively responsible for ensuring that they respect the employee’s rights. Joint liability means that if one employer violates the law, the employee may be able to pursue legal action against both employers, even if one employer complied with the law.

What Are the Proposed FLSA Changes to the New Joint Employer Rule?

The proposed DOL joint employer rule attempts to create a nationwide standard for questions related to joint employment under several federal regulations, including the:

• Fair Labor Standards Act (FLSA),
• Family and Medical Leave Act (FMLA), and
• Migrant and Seasonal Agricultural Protection Act (MSPA)

The FMLA and the MSPA use the FLSA’s standards, so the regulation specifically applies to the FLSA. The DOL’s proposed FLSA changes adopt a legal standard from a court case, with slight modifications. You can comment on the rule through June 22, 2026, after which time the WHD will likely convert it from a proposed to an active rule.

Vertical Employment

For vertical employment, the new joint employer rule introduces four specific factors to decide whether vertical joint employment exists, including whether the employer:

• Hires or fires employees,
• Supervises or controls employee work schedules or conditions of employment to a substantial degree,
• Determines the rate and method of payment, or
• Maintains employment records related to the employee’s work.

These factors originate in a Ninth Circuit Court of Appeals case, Bonnette v. California Health and Welfare Agency, but the proposal modifies the case’s phrasing in two important ways.

First, the Ninth Circuit’s formulation described the first factor as the power to hire or fire rather than actual hiring or firing. The proposed rule acknowledges that an unexercised hiring and firing power may still be relevant to whether joint employment exists, but that the focus should be on powers the employer has actually exercised.

Second, the proposed rule adds “to a substantial degree,” clarifying that an employer must have more than occasional control over the employee.

The regulation acknowledges that additional factors might play a role in the analysis. Two particularly relevant additional factors it identifies include whether the employee is economically dependent on the employer and whether the employee works at a location owned or controlled by the employer.

Horizontal Employment

For horizontal employment, the new joint employer rule establishes three factors to determine whether horizontal joint employment exists, including whether:

• Employers have an arrangement to share the employee’s services,
• One employer acts directly or indirectly in another’s interest in relation to the employee, and
• Employers share direct or indirect control over the employee.

A franchise relationship does not make joint employment more likely. The question is not whether multiple franchise locations are interrelated, but whether they jointly oversee a shared employee.

How Does the Proposal Influence Compensation Compliance?

Compensation compliance involves ensuring your business complies with the law with respect to:

• Wages and overtime,
• Benefits,
• Worker classification as employee vs independent contractor,
• Payroll taxes,
• Pay equity and transparency, and
• Executive compensation.

In general terms, employers should have greater predictability about what does and does not qualify as joint employment under the new proposed rule. Yet, the rule does not relieve employers of their obligations toward shared employees. Businesses should continue reviewing compensation practices, overtime calculations, payroll procedures, and recordkeeping processes where multiple entities share responsibility for workers.

Employers with potential joint employment over employees should ensure they coordinate closely with the employee’s other employer. For example, employers may establish a joint system to track employees’ hours, payroll taxes, withholding, and overtime eligibility.

Joint Liability and Continued Compliance

Unless someone challenges it and a court sees merit in the challenge, the DOL’s joint employer rule is likely to become the controlling legal standard. However, as of this posting (October 2026) the rule is not yet final. Following that standard requires employers to coordinate when they have overlapping authority over any employees.

Employers that work with staffing agencies, subcontractors, franchisees, or other shared-employment arrangements should continue to monitor developments related to the joint employer rule and evaluate how compensation responsibilities are handled.

Outsolve helps employers stay informed about changing employment requirements and develop practical compliance strategies that support accurate compensation practices and workforce management.

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