On September 8, 2020, a Federal Judge in New York struck down a key portion of the U.S. Department of Labor’s (“DOL”) new joint employer rule, which took effect just several months ago in March 2020.

Background:

Under the federal Fair Labor Standards Act (“FLSA”), an employer is any person or entity that “suffers or permits” an individual to work, a definition that is generally regarded as being exceedingly broad. Additionally, more than one employer may “suffer or permit” the same individual to work and therefore be held liable (jointly and severally) for wage and hour violations based on the scope and nature of control each employer has over the employee’s work. This is considered a “joint employer” relationship. For example, if two companies share a workspace and the second company has some authority to supervise or discipline an employee of the first company, the second company may be deemed a joint employer.

The DOL first established joint employer rules in 1958, at which time the concept of who could be held liable as a joint employer was broad and encompassed companies that were not “completely disassociated” in relation to an employee. More recently, the DOL has stressed that the “economic realities” of the relationships between various entities and workers are highly relevant in determining joint employer status.

In January 2020, the DOL published a new rule regarding joint employers, which outlined a four-factor balancing test to determine joint employer status. The four-factor test focuses primarily on the types of direct control employers exert over workers.

Specifically, the four-factor test considers whether the potential joint employer:

  1. hires or fires the employee;
  2. supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
  3. determines the employee’s rate and method of payment; and
  4. maintains the employee’s employment records.

No one factor is dispositive of a joint employer relationship. However, merely maintaining employment records is not sufficient for joint employer status. The new rule has generally been received as employer-friendly in that it provided a more stringent joint employer test, making it more difficult to establish joint employer liability. The new rule took effect in March 2020.

The September 8, 2020 Decision:

On Tuesday, September 8, 2020, Judge Gregory Woods, a U.S. District Court Judge for the Southern District of New York, ruled on summary judgment in favor of a coalition of 17 states and the District of Columbia that brought a case challenging the new rule as unlawfully narrowing the prior, broad definition of “joint employer” (the “Decision”). In the 62-page Decision, Judge Woods held that the new rule violates the Administrative Procedures Act—which governs, among other things, the rulemaking powers of administrative agencies, such as the DOL—and does not comport with the FLSA.

Most importantly, the Decision struck down the new rule as it applies to “vertical” employment relationships (e.g., employees of a subcontractor or staffing agency who are contracted to work for another company). Meaning that vertical employment relationships would not be subject to the strict four-factor joint employer test in the new rule, but would rather be subject to the old, more lenient joint employer rule. This is in contrast to “horizontal” employment relationships, in which related entities both employ or share control of a single employee. The Decision specifically held that new rule’s “non-substantive revisions to horizontal joint employer liability…remain in effect.” Vertical employment relationships are significantly more common than horizontal ones. Therefore, prohibiting application of the new rule to vertical employment relationships means that such relationships are now more likely to face joint employer liability.

More broadly, the Decision held that the new rule “conflicts with the FLSA because it ignores the statute’s broad definitions. And the [DOL] failed to adequately justify its departure from its prior interpretations and to account for some of the final rule’s important costs,” making it arbitrary and capricious. The Decision states that the new rule inappropriately limits the FLSA’s broad definition of “employer” by narrowing the definition of “joint employer” and requiring that a joint employer exercise certain controls over an employee. Additionally, Judge Woods stated that the DOL ignored the important legislative history explaining the reasoning for the broad definition of employment as “suffering and permitting” someone to work. Judge Wood discussed the phrase’s derivation from child-labor laws that were enacted to stop a company from avoiding liability by using a middle man to hire child-workers. He stated that the new rule would disregard this crucial legislative history by potentially allowing a similar “middle man” set-up (i.e., a vertical employment relationship) to evade joint employer status. Moreover, Judge Woods found that the DOL did not have sufficient reason in so drastically altering the prior joint employer rules and failed to address important questions that arose during the notice and comment period.

Takeaways:

While this Decision significantly alters the new rule and could substantially increase joint employer liability, it is likely to be appealed. Therefore, employers should consider whether any changes they made in response to the new rule are affected by the Decision and should prepare to alter their practices accordingly should the Decision stand.