Most business owners are aware that the legal requirement to provide leave under the Family and Medical Leave Act (FMLA) depends on several factors, most notably having 50 or more employees within a 75-mile radius. The employee count for FMLA purposes can be complicated by a workforce where remote employees are included in the count if the office to which they report and from which they receive assignments has at least 50 employees including remote workers and by the FMLA’s integrated employer rule, which may cause separate companies with common ownership to be considered a single employer.
While a simple payroll census seems straightforward, how employees’ worksites are determined for FMLA can raise issues, potentially creating liability for an employer that denies FMLA leave based on misunderstanding the Department of Labor (DOL) guidelines for determining the employee count. Integrated employer issues may occur when several small businesses are separately organized and registered as limited liability companies (LLCs), subchapter S corporations, or other business entities but share majority ownership, as often occurs in family businesses and partnerships.
The DOL’s Rules
IRS tax regulations establish the separate identity of companies registered as corporations, LLCs, and some partnerships. Those companies are treated as distinct and separate from each other for purposes of taxation, stock ownership, and partnership law. Much legal liability can be segregated in this manner so that a risk or loss in one company does not spill over into another company even though the two companies may be registered to the same owner(s).
However, the FMLA is not governed by the IRS or by corporate law. FMLA is governed by the DOL, which has established its own rules for what constitutes legal separation for the purposes of the FMLA. The guidelines for FMLA require that two or more companies registered to the same owner or owners who have 50% or more common ownership may be treated as one common enterprise for purposes of the FMLA in determining how many persons are employed under the integrated employer or common ownership rule. The employees of all the businesses under the DOL’s definition of common ownership may be treated as if employed by a single business, regardless of how the separate entities are registered for tax purposes.
For example, if a business owner has two companies, and one company has 20 employees and the other has 30 employees, the combined total of 50 employees may require that FMLA be available to the employees of both companies. Although each employee must still meet the usual individual eligibility requirements of 12 months of employment, with at least 1,250 hours during the previous 12 months, and all other eligibility standards, they may count as employees for purposes of the FMLA.
Regardless of whether all employees were individually eligible based on length of service or other factors, all 50 employees in this scenario would be counted in the FMLA-aggregated census to determine whether their respective companies must offer FMLA.
A Four-Part Test
To determine whether two or more companies would be subject to the integrated employer rule, courts have relied on a four-part test as stated by 29 CFR § 825.104:
Separate entities will be deemed to be parts of a single employer for purposes of FMLA if they meet the integrated employer test. Where this test is met, the employees of all entities making up the integrated employer will be counted in determining employer coverage and employee eligibility. A determination of whether or not separate entities are an integrated employer is not determined by the application of any single criterion, but rather the entire relationship is to be reviewed in its totality. Factors considered in determining whether two or more entities are an integrated employer include:
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Common management
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Interrelation between operations
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Centralized control of labor relations
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Degree of common ownership/financial control
In Dodge v. JCJL Enterprises, Inc., the court analyzed these factors in detail to find several small corporations, none of which had 50 employees, but were owned by a single family, had met the requirements as an integrated employer due to the involvement of family members in management and recordkeeping of the businesses, centralized control of employees, the exchange of inventory across the businesses, and some degree of shared financial control and resources. The court’s analysis can be found here.
Takeaway for Employers
To avoid liability related to the integrated employer rule, business owners with multiple businesses should recognize that they may be required to offer FMLA to all employees even though their separate businesses may not separately meet the 50-employee rule. For further guidance on this topic, please contact Employers Council at info@employerscouncil.org.