Business owners often operate multiple entities to diversify their ventures, mitigate risk, and maximize opportunities for growth. However, a common misconception among entrepreneurs is believing that two or more businesses they own are entirely separate when it comes to employment law compliance. Unfortunately, this assumption can lead to costly legal mistakes.
Employment laws such as the Fair Labor Standards Act (FLSA), the Family and Medical Leave Act (FMLA), the New Jersey Family Leave Act (NJFLA), and other federal and state laws frequently employ the “joint entity rule,” which may combine separate businesses for compliance and enforcement purposes.
Understanding how the joint entity rule works and taking proactive steps to ensure compliance is essential for protecting your business from potential legal challenges and penalties.
What Is the Joint Entity Rule?
The joint entity rule (also called the “single employer rule” in certain contexts) is a legal principle under employment law that examines whether separate entities should be treated as one integrated employer for purposes of compliance with labor regulations.
Under this rule, two or more businesses owned by the same individual(s) or group of individuals may be considered jointly liable for employment-related obligations if certain factors indicate interrelated operations or control.
Applicable at both the federal and state level, the joint entity rule ensures fairness for employees who work across multiple entities or who are impacted by improper structuring designed to avoid legal obligations.
For example, a business owner might attempt to establish separate entities to avoid meeting compliance thresholds, such as the number of employees required to trigger coverage under FMLA or NJFLA. Courts and regulatory authorities will scrutinize such arrangements to determine whether this division is legitimate or merely an effort to circumvent labor laws.
How the Joint Entity Rule Is Evaluated
Several factors are considered when determining whether multiple businesses should be treated as a single employer. These factors include, but are not limited to:
- Common Ownership: Are the businesses owned by the same individual, group, or parent organization?
- Shared Operations or Management: Do the entities share financial resources, payroll systems, facilities, employees, or executive leadership?
- Control Over Employment Practices: Are employees hired, fired, trained, or supervised by a central management team that oversees both entities?
- Degree of Integration: How intertwined are the businesses in terms of daily operations? For example, do they share marketing, supply chains, or other resources?
- Centralized Decision-Making: Does a single decision-making entity have authority over both businesses?
Courts or regulatory bodies evaluate these elements holistically rather than relying on one factor alone. If sufficient integration is found, separate businesses may be deemed a single entity for compliance purposes.
Implications for Employment Law Compliance
Business owners should carefully consider the joint entity rule when evaluating their obligations under employment laws. Below are examples of how this rule impacts compliance with specific statutes:
Fair Labor Standards Act (FLSA)
The FLSA governs minimum wage, overtime pay, and child labor laws, among other provisions. If two businesses owned by the same person are found to operate as a single entity, their combined employee count may exceed the threshold requiring additional compliance measures. For example, business owners cannot avoid paying overtime wages by artificially splitting employee hours between two entities.
Family and Medical Leave Act (FMLA)
The FMLA requires employers with 50 or more employees to provide unpaid leave for eligible employees. If separate businesses are treated as a joint entity, their combined employee headcount may trigger FMLA requirements even if neither business individually employs 50 workers.
New Jersey Family Leave Act (NJFLA)
Similar to its federal counterpart, the NJFLA mandates job-protected leave for qualifying employees of businesses with at least 30 employees. If two businesses are deemed a single employer due to shared operations, owners cannot avoid compliance by fragmenting employee headcounts.
Other Federal and State Laws
Laws such as the Americans with Disabilities Act (ADA), Title VII of the Civil Rights Act, state wage-and-hour laws, and unemployment benefits programs often look to the joint entity rule when determining employer obligations. For example, workplace discrimination claims may involve reviewing whether two entities operate as a single employer with shared responsibilities.
Avoid Structuring to Evade Compliance
Courts take a dim view of businesses attempting to dodge labor law obligations by artificially segmenting operations. Rather than focusing on avoiding compliance, prioritize lawful and ethical business practices.
Marzano Human Resources Consulting
Operating multiple businesses can be an effective growth strategy, but it comes with added complexities, especially when dealing with employment law compliance. Marzano HR Consulting works with clients with diverse business interests to ensure compliance with all federal, state and local employment laws. Reach out for a no-cost initial consultation.