Earlier this year, the U.S. Department of Labor (DOL) issued a rule updating its interpretation of the “joint employer” doctrine under federal wage and hour law. Yesterday, however, a New York federal judge struck down a significant portion of the rule. Judge Gregory H. Woods’ 62-page decision delivers a significant blow to businesses that had relied on the business-friendly nature of the DOL’s new rule.

By way of background, the joint employment doctrine refers to a situation where a worker is deemed employed by more than one entity at the same time. If multiple entities are considered joint employers, they can then generally each be held jointly and severally liable for workplace violations (e.g., discrimination, harassment, retaliation, unpaid wages).

The DOL’s guidance for determining joint employer status under the federal Fair Labor Standards Act (FLSA) has evolved several times in recent years. In 2016, for instance, the former head of the DOL’s Wage and Hour Division issued guidance that increased scrutiny of situations in which multiple companies might employ workers jointly. That guidance was rescinded in 2017, however, and ultimately replaced by the DOL’s new rule, which took effect on March 16, 2020.

The new rule simplified the FLSA’s joint employer analysis with a four-factor test for determining whether workers are jointly employed by associated businesses or persons. The four factors looked to 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.

The new rule’s pro-business approach clarified that a joint employer under the FLSA must actually exercise, directly or indirectly, one or more of the above four factors.

The new rule was quickly challenged, however. In a February 2020 lawsuit, 17 states and the District of Columbia argued that the DOL’s interpretation of the joint employment doctrine was overly restrictive. In yesterday’s ruling, Judge Woods agreed in large part.

Specifically, Judge Woods nixed the portion of the DOL’s rule applying to “vertical” joint employment relationships – i.e., situations where “an employee has an employment relationship with one employer (typically a staffing agency, subcontractor, labor provider, or other intermediary employer) and the economic realities show that he or she is economically dependent on, and thus employed by, another entity involved in the work. This other employer, who typically contracts with the intermediary employer to receive the benefit of the employee’s labor, would be the potential joint employer.” The Judge concluded that, as it related to vertical relationships, the rule violated the Administrative Procedure Act, improperly revised the FLSA’s long-recognized definition of “employer,” applied the test differently to “primary” and “joint” employers, and failed to justify why its benefits outweigh the costs to workers, including the inability to collect back wages.

Nevertheless, Judge Woods severed from the final rule and let stand the portion of the rule applying to a “horizontal” joint employment relationship, which “exists where the employee has employment relationships with two or more employers and the employers are sufficiently associated . . . with respect to the employee [so] that they jointly employ the employee.” According to the Court, this was appropriate because the rule “makes only ‘non-substantive revisions’ to existing law for horizontal joint employer liability.”

Judge Woods’ ruling presents an important opportunity for companies to review current relationships with workers whom they do not directly employ but from whom they receive some type of beneficial service.