August 07, 2026 | Posted By: Emma Doull
On April 22, 2026, the U.S. Department of Labor’s Wage and Hour Division published a proposed rule that would change how the agency decides when two businesses share legal responsibility for the same worker. This concept, known as joint employer status, matters because a joint employer finding can make one company liable for another company’s wage and hour violations, unpaid overtime, or failure to provide leave under the Family and Medical Leave Act. If your business relies on a staffing agency, works with contractors or subcontractors, operates as a franchisor, uses a professional employer organization, or shares management functions with an affiliated company, this proposal deserves your attention now. The public comment period closed on June 22, 2026, and the Department is reviewing those comments as it moves toward a final rule.
What the Proposed Rule Would Change
Since 2021, the Department of Labor has lacked a clear regulatory standard for joint-employer status under the Fair Labor Standards Act. Courts across the country have filled that gap with different tests, leaving many employers uncertain about their exposure. The new proposal would restore a defined standard at 29 CFR Part 791, the section of the federal wage and hour regulations that covers joint employment, and would, notably, apply that same standard under the FMLA and the Migrant and Seasonal Agricultural Worker Protection Act. In practice, this means that one unified analysis would determine joint employer status for wage claims, overtime disputes, and leave obligations alike, rather than three separate, potentially inconsistent tests.
Vertical Joint Employment: The Four Factors
The proposal distinguishes two kinds of relationships. The first, known as vertical joint employment, typically arises when a worker is on the payroll of a staffing agency or subcontractor but performs work that benefits a second business, such as the company that hired the staffing agency. Under the proposed rule, that second business is more likely to be treated as a joint employer to the extent it has the power to hire or fire the worker, supervises or controls the worker’s schedule or working conditions to a substantial degree, sets the worker’s rate and method of pay, and keeps the worker’s employment records.
Importantly, the Department has proposed that no single factor controls the outcome on its own. The analysis is meant to weigh the full relationship, and the Department has indicated that a business’s reserved but unexercised right to control a worker still matters, though actual, exercised control carries more weight than a right that sits unused in a contract.
Horizontal Joint Employment
The second category, horizontal joint employment, applies when the same employee works for two or more related businesses in the same workweek, such as two affiliated companies that coordinate staffing or share ownership. Here, the test looks at whether the businesses are sufficiently connected with respect to that particular employee’s job. The Department has been clear that ordinary commercial relationships, such as sharing a vendor or a common franchisor, are not, by themselves, sufficient to create horizontal joint-employer status. Employers can review the full text of the proposal on the Federal Register.
Why This Matters for Franchise, Staffing, and PEO Relationships
A joint employer finding is not a technicality. It can mean that a company with no direct role in day-to-day supervision becomes responsible for another company’s unpaid wages, overtime violations, or FMLA denials. Businesses that rely on outside general counsel or in-house HR teams to manage these relationships should treat this proposal as a reason to take a closer look at how contracts are drafted and how they play out in practice.
Steps Employers Should Consider Now
While the proposed rule remains under review, employers do not need to wait to reduce their risk. It is worth starting with an honest inventory of every staffing, subcontracting, franchise, PEO, management services, and affiliated company relationship the business relies on, noting who actually makes decisions about hiring, firing, scheduling, discipline, pay, and recordkeeping in each one. Contracts should then be compared against that reality. A contract that reserves broad rights to supervise or direct another company’s workers, even rights the business does not intend to use, can create exposure under a standard that considers reserved control. Where those provisions do not serve a genuine business need, narrowing them is worth considering.
It also helps to reduce unnecessary day-to-day involvement in a contractor’s or staffing employee’s work. Performance issues, attendance problems, and scheduling questions are generally best routed through the company that formally employs the worker, rather than handled directly by the business that benefits from the work. Finally, supervisors and managers who interact with contractor or staffing employees should understand that casual instructions, direct discipline, or informal scheduling changes can carry legal weight they may not expect. A firm that offers HR consulting services can help translate this proposal into practical guidance for the managers who interact with these workers every day.
A Rule Facing Political Headwinds
The proposal is not without opposition. On June 22, 2026, House Democrats, led by Representatives Bobby Scott and Ilhan Omar, sent a letter to Acting Labor Secretary Keith Sonderling urging the Department to withdraw the rule. The lawmakers argue that narrowing who can be held responsible for labor law violations would shield larger businesses that rely on subcontractors or farm labor contractors with weaker compliance practices, and that the proposal’s weighting of certain factors undermines a more complete view of the employment relationship.
This kind of political pushback does not stop rulemaking on its own, but it does signal that the final rule, if and when it is adopted, may face continued scrutiny and potentially legal challenges after it takes effect. Employers should treat this as a developing area of law rather than a settled one, and should expect to revisit their staffing and contractor relationships once a final rule is published.
How Hoyer Law Group Can Help
Understanding how a proposed federal rule might apply to your specific staffing, franchise, or contractor relationships takes more than reading the headlines. Our employment law and business law attorneys work with employers to review existing contracts, assess joint employer exposure, and put practical safeguards in place before a dispute arises.
If your business wants to understand how the Department of Labor’s proposed joint employer rule could affect your staffing, franchise, or contractor relationships, contact Hoyer Law Group for a confidential evaluation. Visit our contact page or call (844) 531-0082 to speak with our team.
This blog is for general informational purposes only and does not constitute legal advice. For advice specific to your situation, please consult a qualified attorney.