Judge Woods of the US District Court for the Southern District of New York on September 8 vacated the US Department of Labor’s new test for joint employment, which focuses only on the putative joint employer’s right to control the employee, in contrast to prior DOL interpretive guidance that looked at the worker’s economic dependence on the putative joint employer.
The US Department of Labor’s (DOL’s) joint employer final rule, which became effective in March 2020, instituted a “control” test to determine whether an employer may be deemed a joint employer of another company’s employees pursuant to the Fair Labor Standards Act (FLSA). Joint employment status is an important and frequently litigated issue because under the FLSA, joint employers are jointly and severally liable for all wages due to an employee for all hours worked for either entity. In the last few years there has been considerable debate among courts and even at DOL on what the applicable test should be to determine joint employer status.
Under the prior DOL joint employer rule, promulgated in 1958, multiple persons can be joint employers of an employee if they are “not completely disassociated” with respect to the employment of the employee. See former 29 CFR Part 791. This standard, combined with court decisions requiring the application of multifactor tests, and a now-withdrawn 2016 Wage and Hour Division (WHD) Administrator’s Interpretation (AI), have caused confusion for employers. DOL’s new rule established a new test for “vertical” joint employment, which exists when an employee works for one employer but the terms and conditions reflect that she is jointly employed by one or more other entities, or as DOL explained, another entity simultaneously benefits from her work.
Under the new test, DOL identified four factors that indicate a purported joint employer exercises actual control over the employee: The 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 of pay and method of payment; and (4) maintains the employee’s employment records.
Seventeen states and the District of Columbia challenged the DOL rule under the Administrative Procedure Act (APA). Judge Woods’ order vacated DOL’s test for vertical joint employment but left intact DOL’s changes to “horizontal joint employment,” which exists where the employee has employment relationships with two or more employers and the employers are sufficiently associated with that employee that they jointly employ the worker. Because the final rule made only nonsubstantive changes to the 1958 rule on horizontal joint employment, the court severed and upheld that portion of the rule.
Judge Woods held that DOL’s rule violated the APA under two separate analyses. First, he found that the rule is contrary to law because it based joint employer liability only on the FLSA definition of “employer,” ignoring the FLSA’s text and Supreme Court and lower court precedent that define joint employer liability under three interrelated definitions: employer, employee, and most significantly, “employ.” Taken together, Judge Woods held that these FLSA definitions are an expansive definition that defines the employment relationship based on the economic dependence of the worker.
Second, Judge Woods found that the rule is arbitrary and capricious because DOL did not explain why it departed from prior guidance or why it conflicted with the regulations of a sister statute (the Migrant and Seasonal Agricultural Workers Protection Act), and did not adequately consider the costs to workers. Judge Woods therefore rejected DOL’s control test and in effect endorsed the Obama-era AIs that looked at the economic dependence of the employee on the putative joint employer. Those AIs have been and remain withdrawn, and because the new rule is now vacated, the 1958 rule is now back in effect.
DOL could issue a revised rule that provides a more robust economic analysis and explains why it has departed from its prior interpretations. However, a revised rule would also need to address Judge Woods’ extensive analysis of the FLSA text and Supreme Court precedent. Instead, DOL is more likely to appeal the decision and may also argue that the reach of the decision is limited either to the Southern District of New York (SDNY) or to the 17 states and District of Columbia, which challenged the rule (Judge Wood did not address the scope of his order). An appeal, or revised rule, will of course take time, and a new administration could change course.
Key Takeaways and Recommendations
The court’s decision leads to further uncertainty for businesses that use contingent workers or have franchise or other vendor or business arrangements because it is unclear whether the scope of the decision extends beyond the SDNY to the 17 states and District of Columbia challenging the rule, or even nationwide.
Companies that relied on DOL’s new control test to restructure business relationships should consult with counsel as to the applicable law in their jurisdictions because the federal circuit courts apply different, multifactor tests, and state laws may vary.
Companies should remain diligent to ensure that vendors, franchisees, and other business partners determine rates, methods of pay, and how, when, and where work will be performed, in addition to applying other factors depending on where they operate.