Muddy Waters is how you want your blues, not how you want your laws.
A federal district judge in New York yesterday kicked up a lot of mud in an area of the law that had finally seen some clarity – the definition of “joint employment.” Now we’re back in the muck.
Yesterday’s ruling struck down the Department of Labor (DOL) regulation on “joint employment.” The DOL’s regulation, 29 CFR 791.1 to .3, took effect in March 2020, after a Notice and Comment Period that included 57,000 comments. The purpose of the DOL’s rule was to bring clarity to the meaning of “joint employment” under the Fair Labor Standards Act (FLSA). Before the rule, the meaning of “joint employment” had been a grime-filled slopfest.
The effect of yesterday’s ruling is to replace clarity with both the old mess with a new mess. The old mess is the lack of a coherent joint employment standard. The new mess is that this ruling applies only in the Southern District of New York. Now we have a DOL regulation on the books that applies or doesn’t apply depending on where you live.
The DOL rule had adopted a four-factor test for determining whether an employee is a joint employee under the FLSA. The factors are whether the putative joint employer “(i) hires or fires the employee; (ii) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; (iii) determines the employee’s rate and method of payment; and (iv) maintains the employee’s employment records.” Simple, formulaic and easy to follow. And the DOL didn’t just make it up.
Its four-factor test is based on the four-factor test created by the Ninth Circuit U.S. Court of Appeals in 1983 in a case called Bonette. In other words, the DOL test originated with the most liberal, pro-employee appellate circuit in the country. But Judge Gregory Woods rejected the test as too rigid. Woods ruled that the four factors unduly focus on the extent of control exerted over the worker, when the meaning of “employ” under the FLSA extends more broadly than the scope of a Right to Control Test, which measures – you guessed it – the right of a business to control a worker. The definition of employ under the FLSA includes “suffer or permit to work,” which the Supreme Court has said is intentionally broad and does not depend on control.
True, employ is defined broadly under the FLSA, and that is why the determination of whether someone is an employee or an independent contractor under the FLSA is made using an Economic Realities Test, not a Right to Control Test.
But the Economic Realities Test and the suffer-or-permit standard apply for determining whether someone is an employee or an independent contractor. That has not been the test for whether an employee is also a joint employee. This is where Woods’ analysis fell short. He considered the tests to be one and the same. They are not.
Like various circuit courts, the DOL relies on a two-step inquiry for determining whether there is joint employment.
First, is the individual an employee or an independent contractor? That is the question the suffer-or-permit test is designed to answer. An Economic Realities Test is used to make that determination.
Second, if the worker is an employee, is the secondary company also a joint employer?
Woods says the broad suffer-or-permit test should be used to answer both questions. Not so. Just because business No. 1 employs a worker doesn’t mean that business No. 2 also employs that worker. Under the court’s analysis, joint employment status would be automatic in any subcontracting situation. The rule would be that your subcontractor’s employees are your employees. End of story. But that is wrong. It has never been as simple as that, even under the far more liberal interpretations of joint employment offered by the DOL during the Obama administration.
Woods’ analysis on this point is hidden largely in a footnote, in which the judge notes his disagreement with the Fourth Circuit Court of Appeals in a case called Salinas. The Salinas court said that the inquiries are different. That’s because they are. Even the Ninth Circuit, when interpreting the scope of Dynamex, recognizes that the test for joint employment is different from the test for determining who is an employee in the first place.
Woods gets it wrong and substitutes his preferred interpretation of the FLSA for the DOL’s interpretation of the FLSA, when the DOL is the federal agency charged with interpreting the FLSA. Woods also rejects the Ninth Circuit’s decision in Bonette, which created the four-factor test for joint employment that the DOL uses.
The court also found that the DOL’s joint employer rule is “arbitrary and capricious” because it would impose costs on workers who might otherwise – in the absence of such a rule – be deemed joint employees. The DOL test resulted in more clarity and potentially less joint employment. Less joint employment could cost workers money, since they cannot collect judgments from companies that are not their joint employers. But that doesn’t make the new rule arbitrary and capricious. The court’s reasoning is as thin as my hairline. The only way workers would have been entitled to collect more money is if they could collect money judgments from joint employers, but they can collect judgments from joint employers – if those businesses are truly joint employers. The DOL’s joint employment test results in fewer incidents of joint employment than under the judge’s preferred way to identify joint employers. But that doesn’t mean the DOL test is wrong.
The practical effect of this ruling is unclear. This is one decision by one district court in one state. The decision will be appealed to the Second Circuit Court of Appeals, which will take a fresh look at it. Other circuit courts, if faced with the same issue, can reach different conclusions.
Just when it looked like businesses had more clarity about what it means to be a joint employer, this decision has muddied the waters again. Good for your blues. Bad for your laws.