The DOL’s New Joint Employer Rule Could Expand Liability for Businesses

If your business uses contractors, staffing agencies, franchise relationships, subcontractors, or shared employees, a proposed rule from the U.S. Department of Labor (DOL) could significantly impact how your business is evaluated under federal labor laws.

On April 23, 2026, the DOL released a proposed rule designed to clarify when two or more businesses can be considered “joint employers” under the Fair Labor Standards Act (FLSA), Family and Medical Leave Act (FMLA), and Migrant and Seasonal Agricultural Worker Protection Act (MSPA).

While the proposal is technical, the practical impact is straightforward: businesses may face increased exposure to wage claims, leave violations, penalties, and compliance obligations if they are found to jointly employ workers alongside another company.

For employers operating across multiple states, the proposal also attempts to solve a long-standing problem: inconsistent standards across federal courts that have created uncertainty for years.

Why Joint Employer Status Matters

Joint employer status determines whether multiple businesses share legal responsibility for employees.

If two companies are considered joint employers, both may become jointly liable for:

• Unpaid wages or overtime

• FMLA violations

• Recordkeeping failures

• Labor law penalties and damages

  
  

That means a company can potentially face liability even if the worker was hired or directly managed by another entity.

This issue commonly arises in business relationships involving:

• Staffing agencies

• Franchises

• Contractors and subcontractors

• Shared workforces

• Vendor relationships

• Temporary labor arrangements

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Because the financial stakes can be substantial, businesses have long pushed for clearer guidance on how joint employer status is determined.

The DOL Is Trying to Create One National Standard

Since 2021, there has been no active federal rule governing joint employer status under the FLSA after the DOL rescinded the Trump administration’s 2020 rule following legal challenges.

Without a uniform rule, courts across the country began applying different legal tests depending on the federal circuit involved. As a result, the same business arrangement could produce different outcomes depending on where a lawsuit was filed.

The proposed 2026 rule aims to create a single nationwide framework that applies consistently under the FLSA, FMLA, and MSPA.

For businesses operating in multiple states, that consistency could provide more predictability. At the same time, the proposed rule also expands the scope of factors regulators may consider when evaluating joint employer relationships.

The Two Types of Joint Employment

The proposed rule separates joint employment into two categories: horizontal and vertical joint employment.

Horizontal Joint Employment

Horizontal joint employment applies when an employee works for two related employers during the same workweek.

For example, this could happen when businesses:

• Share employees

• Coordinate schedules

• Operate under common ownership

• Exercise shared control over workers

  
  

Under the proposal, businesses are more likely to be considered joint employers if they act together in managing or benefiting from the employee’s work.

Vertical Joint Employment

Vertical joint employment is the area most businesses should pay close attention to.

This applies when one business directly employs a worker, but another company also benefits from that worker’s labor. Common examples include:

• Staffing agencies and client companies

• Contractors and subcontractors

• Franchisors and franchisees

  
  

The DOL proposes a four-factor test to determine whether joint employment exists:

1. Whether the potential joint employer hires or fires the worker

2. Whether it substantially controls schedules or working conditions

3. Whether it determines pay rates or payment methods

4. Whether it maintains employment records

   
   

No single factor automatically determines the outcome. Instead, regulators would evaluate the totality of the circumstances.

Reserved Authority Can Still Create Risk

One of the biggest changes in the proposed rule is the treatment of “reserved control.”

Under the previous 2020 rule, businesses generally needed to actively exercise control over workers before joint employer status would apply.

The new proposal takes a broader view.

Even if a company never actually exercises authority, simply having the contractual right to control certain employment decisions may still support a joint employer finding. For example, if agreements give a company authority over staffing decisions, schedules, workplace rules, or discipline, that reserved authority may become relevant even if it is rarely used in practice.

The DOL states that actual control still matters more than theoretical authority, but businesses can no longer assume unused contractual powers are legally irrelevant.

The Rule Also Reintroduces Economic Dependence Factors

The proposed rule also allows regulators to consider economic dependence when evaluating relationships.

That means the DOL may examine whether workers rely heavily on a particular business for their livelihood, even if they are technically employed by another company.

While economic dependence is not the main test for joint employment, its inclusion broadens the analysis beyond the narrower approach adopted in 2020.

For employers, this means the overall evaluation becomes more flexible and potentially more expansive.

Some Common Business Practices Receive Protection

The proposed rule does provide reassurance for certain standard business practices.

According to the DOL, the following activities alone should not automatically create joint employer liability:

• Operating as a franchisor

• Requiring compliance with workplace laws

• Enforcing safety standards

• Maintaining quality control requirements

• Providing sample employee handbooks

• Participating in shared benefit or apprenticeship programs

  
  

This clarification is particularly important for franchise systems and businesses that maintain operational standards across multiple locations.

However, the DOL declined to protect all business arrangements equally. For example, ownership or control of business premises may still be considered relevant in some cases.

Why Businesses Should Pay Attention Now

Although the rule is still only proposed, businesses should begin evaluating potential exposure now, especially if they rely on complex workforce structures.

Companies should review:

• Staffing agreements

• Franchise agreements

• Contractor relationships

• Operational control provisions

• Workplace policies

• Payroll and recordkeeping practices

  
  

In many cases, businesses may discover they have broader contractual authority than intended, which could later support a joint employer finding.

Even businesses that believe they operate independently may face increased scrutiny if they maintain significant oversight over another company’s workforce.

The Legal Landscape Is Still Changing

Joint employer standards have shifted repeatedly over the past decade across both the DOL and the National Labor Relations Board (NLRB).

Different presidential administrations have taken dramatically different approaches, and federal courts have often disagreed about the proper legal standard.

As a result, this area of law remains politically and legally volatile. Even if the proposed rule becomes final, future administrations or court challenges could reshape the framework again.

That uncertainty makes proactive legal review even more important for businesses operating in industries heavily dependent on shared labor arrangements.

What Businesses Should Do Next

The proposed DOL rule signals a broader approach to joint employer liability than businesses have operated under in recent years.

While some safe harbors remain intact, the inclusion of reserved control and economic dependence factors expands the overall analysis and could increase exposure for businesses using staffing, subcontracting, or franchise models.

Businesses should not wait for the final rule to begin reviewing their relationships, contracts, and operational practices.

A proactive review now can help identify areas of unnecessary risk before regulatory enforcement or litigation forces the issue later.