Court Strikes Down Recent Joint Employer Rule

On September 8, 2020, a New York federal judge struck down most of a U.S. Department of Labor (“DOL”) rule that had narrowed the definition of “joint employer” by limiting when multiple businesses would be liable to the same worker under federal wage and hour law.  The lawsuit was filed by the attorneys general of 17 states and Washington, DC, who argued that the narrowing of the standard would eliminate important labor protections for workers and would make it more difficult to hold companies liable for violations by franchisees and contractors of minimum wage and overtime laws.

Brief History of the Joint Employer Rule

Although the Fair Labor Standards Act (“FLSA”) does not explicitly reference joint employment, the DOL has long recognized that workers may have multiple employers when employment by one employer is “not completely disassociated” from employment by the other employer.  The DOL has periodically updated this definition via informal guidance, most recently in 2014 and 2016, when it issued bulletin memorandums directing agency investigators to look past employers’ control over workers to the “economic realities” of their relationship.

The DOL rescinded those memorandums soon after President Trump took office in 2017 and proposed the first update to its formal joint employment regulations in decades, which was finalized in January 2020.  January’s final rule emphasized a company’s control over its workers, saying joint employment hinges on the division of powers to (1) hire and fire; (2) supervise and schedule; (3) set pay; and (4) maintain employment records.

The DOL’s attempt at narrowing the joint employer standard was seen as business-friendly and anti-labor, as labor advocates argued that employers who have franchise relationships or rely on subcontractors benefited from the new standard.  As a result, in February 2020, New York and 17 other states sued to block the rule, accusing the DOL of exposing workers to wage theft by narrowing its definition of joint employment further than the FLSA allows.

New York Federal Court Ruling

On September 8, 2020, Judge Gregory Woods of the U.S. District Court for the Southern District of New York issued a ruling striking down the majority of the new rule and agreeing with New York and the other 17 states who had challenged the rule.

According to Judge Woods, the new rule was “arbitrary and capricious” because the DOL failed to justify its departure from its prior interpretations of the joint employer rule or account for its costs to workers, which the states estimated at more than $1 billion annually. Judge Woods also ruled that the Trump administration’s changes to the joint employer doctrine were too narrow since they required a company to actually exercise control in the workplace instead of simply having the right to exercise control, and the DOL did not adequately explain why it disregarded evidence that narrowing its joint employment test would expose workers to wage theft.  Additionally, Judge Woods found that the new rule conflicted with the plain language of the FLSA because it ignored the statute’s broad definitions. 

As a result, Judge Woods vacated the portion of the rule applying to “vertical” employment relationships, in which workers for a staffing company or other intermediary are contracted to another entity.  However, he let stand the portion applying to “horizontal” relationships, in which a worker is employed by two “sufficiently associated” businesses.

Impact to Employers

It is likely that the DOL will appeal this ruling to the U.S. Court of Appeals for the Second Circuit, so this will not be the last time that a court opines on this issue.  In the meantime, however, there is no disputing that this ruling (especially if upheld on appeal) is a blow for the business community, which had urged the Trump administration to narrow the federal joint employment doctrine that had been expanded under the Obama administration. 

Due to this court ruling, employers now have less certainty about their relationship with one another in the joint employment context.  Thus, if any employers have revised their contracts with staffing agencies, subcontractors, or other intermediary employers since January, they should review those contracts to make sure they do not violate the joint employment standard that was in place prior to January.  And, until an appeal is ruled on or further guidance from the courts is issued, employers should adhere to the more expansive definition of joint employment when drafting contracts with staffing agencies or other subcontractors going forward.  

As always, we will keep you apprised of future developments in this ever-changing area of the law.

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