Seyfarth Synopsis: Today, the U.S. Department of Labor rescinded the final rule entitled “Joint Employment Status Under the Fair Labor Standards Act,” more commonly known as the Joint Employer Rule. This alert provides an overview of the DOL’s action and its impact on employers.

With the growth of the gig economy and in light of the varying standards that have developed among the courts in the over-80-years since the passage of the Fair Labor Standards Act, the U.S. Department of Labor in January 2020 issued its first formal rule delineating the standard that should be applied to determine whether an entity qualifies as a joint employer. The rule’s discussion of horizontal joint employment – which assesses when multiple putative employers are sufficiently associated that hours worked for each must be aggregated to determine liability – substantively tracked prior DOL guidance. However, with respect to vertical joint employment, which assesses situations in which work for an employer simultaneously benefits another entity, the new rule adopted a four-factor test that focused primarily on 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.

Today, sixteen months after that rule went in effect, it is effectively dead.

The Joint Employer Rule

The DOL’s joint employer rule had been under assault almost from its announcement. In February 2020, before the rule went into effect, a group of state attorneys general filed a complaint in the Southern District of New York, seeking to invalidate the rule. The court ultimately agreed to vacate the rule, at least with respect to vertical joint employment, reasoning, among other things, that the DOL’s test reflected an impermissibly narrow interpretation of the FLSA, that the rule departed from the DOL’s prior interpretations without adequate explanation, and that the DOL had failed to consider the rule’s costs to workers.

The DOL appealed that decision to the Second Circuit, and submitted briefing in January 2021 supporting the challenged rule. Only two months after announcing that support, the DOL published a notice of proposed rulemaking, in which it proposed to rescind the joint employer rule, largely based on arguments contrary to its appeal. And today, while the appeal remains pending, the DOL issued its final rule of rescission, largely agreeing with the issues raised by the decision from the Southern District of New York. The DOL also went a step further than that decision and rescinded the rule’s horizontal joint employment analysis, concluding that the rule’s discussion of vertical and horizontal joint employment were intertwined, and that leaving the latter in place would engender confusion.

Impact on Employers

With the joint employer rule now rescinded, companies must look to the pre-rule patchwork of federal court decisions that vary across (and even within) jurisdictions to assess whether they may qualify as joint employers of third parties’ personnel under the FLSA. At the same time, employers need to continue to evaluate how different joint employer standards under state wage laws may create additional opportunities for exposure. Finally, employers should prepare for the possibility that the Biden Administration will use legislation, rulemaking, or non-binding guidance to expand the situations in which a company may be found to be a joint employer, particularly as the need for a uniform joint employment standard remains unaddressed.