Within the context of the private equity (PE) landscape, employment law liability has often been viewed as a portfolio company problem. That assumption is becoming increasingly risky, however. As regulators and plaintiffs’ attorneys sharpen their focus on the relationship between PE sponsors and their portfolio companies, fund managers and investors need to understand how joint employer liability could extend beyond the portfolio company and attach directly to the fund itself.

What is joint employer status?

Joint employer status arises when two or more entities are found to share or co-determine the essential terms and conditions of a workforce’s employment, such as wages, hours, hiring, firing, discipline, and supervision. The doctrine operates across multiple federal and state regulatory regimes, including the National Labor Relations Act (NLRA), the Fair Labor Standards Act (FLSA), Title VII of the Civil Rights Act, and concomitant state laws, though each applies a somewhat different analytical test.

Under the NLRA, for example, the standard has experienced significant volatility over the past decade, with changes in presidential administrations resulting in changes in National Labor Relations Board (NLRB) composition and, consequently, modifications to the applicable test. In 2015, the NLRB’s landmark Browning-Ferris Industries decision broadened the joint employer test, holding that indirect control and even unexercised reserved authority over workers could support a joint employer finding. The Biden-era NLRB attempted to codify an even broader standard in 2023, but a federal court in Texas vacated that rule before it took effect.

On February 26, 2026, the NLRB formally reinstated a narrower 2020 standard, which requires “substantial direct and immediate control” over essential employment terms to establish joint employer status. Meanwhile, the FLSA applies a broader “economic reality” test, examining factors such as hiring and firing authority, supervision and control of work conditions, pay rate determinations, and maintenance of employment records.

Notably, on April 22, 2026, the U.S. Department of Labor announced a proposed rule that would, for the first time in several years, restore formal regulatory guidance on joint employer status under the FLSA and the Family and Medical Leave Act. Like the rule adopted during President Trump’s first term, the proposal emphasizes direct control rather than indirect or reserved authority, making it harder to establish joint employer status. If finalized, the rule would bring the FLSA joint employer standard closer in line with the NLRB’s reinstated “substantial direct and immediate control” test, potentially narrowing fund-level exposure. Given the Supreme Court’s decision in Loper-Bright, the degree of deference courts will ultimately afford the proposed rule is uncertain.

The present regulatory environment is more employer-friendly, but PE firms should not be complacent. A pending challenge by the Service Employees International Union in the D.C. Circuit could again reshape the NLRA standard, and the FLSA’s economic reality test remains independently broad.

How PE ownership models can trigger joint employer risk

The typical PE operating model – active ownership – is precisely what can create risks of joint employer exposure. Indeed, courts and regulators have looked at several hallmarks of PE involvement when assessing whether a fund has crossed the line from investor to employer:

• Centralized control over HR policies. When a fund mandates standardized employee handbooks, compensation structures, or benefits plans across portfolio companies, this can evidence direct control over essential employment terms.
• Shared services arrangements. Providing centralized payroll, HR administration, or back-office services may indicate the fund is performing core employer functions.
• Operational oversight and board representation. Fund partners who sit on portfolio company boards and actively direct day-to-day employment decisions – rather than setting broad strategic objectives – may be exercising the type of “substantial direct control” that the current NLRA standard requires.
• Management fee structures and seconded personnel. Fund employees embedded at portfolio companies who supervise, hire, or discipline portfolio company workers create a strong basis for a joint employment finding.

Consequences of a joint employer finding

If a PE firm is deemed a joint employer, the consequences extend far beyond the portfolio company level and can include:

• Collective bargaining obligations. The fund could be required to bargain with unions representing portfolio company employees over terms it controls.
• Joint and several liability. Joint and several liability under the FLSA and Title VII means the fund itself could be on the hook for unpaid overtime, minimum wage violations, damages, and other associated penalties, which in more employee-friendly jurisdictions have been increasing in recent years.
• Unfair labor practice exposure. Under the NLRA, joint employers share liability for unfair labor practices committed by the other employer and may be subject to union picketing and secondary boycott activity.
• Multiplied litigation risk. A fund managing dozens of portfolio companies could face compounding exposure if joint employer status is established across multiple investments, along with corresponding discovery obligations, document preservation burdens, and increased insurance costs.

Risk mitigation strategies

PE funds can take proactive steps to reduce joint employer exposure without sacrificing the operational value creation that drives returns:

1. Preserve portfolio company autonomy. Allow each portfolio company to set its own employment policies, handbooks, compensation structures, and HR practices. If model policies are offered, their adoption should be clearly voluntary.
2. Structure shared services carefully. If the fund provides back-office services, contracts should limit the fund’s decision-making authority over employment matters and make clear the portfolio company retains sole employer status.
3. Define board-level roles. Fund representatives on portfolio company boards should focus on strategic oversight rather than directing day-to-day employment decisions.
4. Conduct employment-focused due diligence. Before acquisition, assess the target’s labor relations landscape, union exposure, pending employment litigation, and existing shared service or management arrangements that could create joint employer risk.
5. Include contractual protections. Management services agreements and operating contracts should expressly disclaim any employment relationship between the fund and portfolio company employees, allocate employment decision-making authority to the portfolio company, and include indemnification provisions for employment-related liabilities.

Joint employer liability is not an abstract legal concept for PE sponsors – it is a concrete business risk that demands attention from fund managers and portfolio company executives alike. The time to evaluate your firm’s exposure is now, not after a complaint is filed.