Update on Joint Employment Rule

September 16, 2020

On Sept. 8, a federal district court judge vacated the “vertical” relationship portion of the U.S. Department of Labor’s joint employment rule (State of New York, et al. v. Scalia, No. 1:20-cv-01689 (Sept. 8, 2020)). The agency in January narrowed the criteria for finding that separate employers can be jointly liable for Fair Labor Standards Act (FLSA) violations. A group of states sued, alleging, among other things, that the rule was inconsistent with the statute. The judge agreed, voiding the portion of DOL’s regulations that addressed vertical relationships, such as those involving staffing companies or subcontractors. The court, however, allowed the agency’s “horizontal” rule to stand, which regulates situations in which an employee has a relationship with two associated employers.

Judge Gregory H. Woods of the U.S. District Court for the Southern District of New York ruled that the DOL regulation is “arbitrary and capricious” and inconsistent with the FLSA, setting aside the department’s new standard. The ruling vacates the agency’s new test for vertical employment, referring to when a worker enters an employment relationship with one company, such as at a staffing agency or subcontractor, but is economically dependent on another employer.

The Trump administration’s regulation was issued against the backdrop of conflicting judicial interpretations of the matter—a significant business concern for restaurant franchise owners and large companies that enter into contracts with third parties for janitorial services and temporary staffing, among other arrangements. Corporations such as McDonald’s, Amazon, and Comcast have faced private lawsuits arguing the companies are jointly responsible, along with third-party contractors, for workers’ unpaid minimum wages and overtime.

Judge Woods invalidated the rule on multiple grounds, arguing that it strayed from the Labor Department’s pre-Trump stance, which had emphasized the FLSA’s broad definition of “employ” as “to suffer or permit to work.”

“If the Department departs from its prior interpretation, it must explain why,” Woods stated in his opinion. “And it must make more than a perfunctory attempt to consider important costs, including costs to workers, and explain why the benefits of the new rule outweigh those costs. Because the Final Rule does none of these things, it is legally infirm.”

Woods preserved the DOL’s standard for horizontal employment, or when a worker has separate employment relationships with multiple businesses that are associated with each other. However, horizontal scenarios arise far less frequently than vertical employment, and aren’t the primary source of employer angst about an expanded application of joint employment undertaken since the Obama administration.

The January regulations, according to a DOL fact sheet, provided a four-factor balancing test to determine when a person is acting directly or indirectly in the interest of an employer in relation to the employee and also clarified that an employee’s “economic dependence” on an employer does not determine whether it is a joint employer under the FLSA.

The change came after employers requested clarity on the issue. Various courts and jurisdictions maintain disparate joint employment tests, and some stakeholders have long pushed for a streamlining of those tests. Some even called for congressional intervention, asking lawmakers to adopt one test for several laws, most notably the FLSA and the National Labor Relations Act.

DOL’s FLSA rule generally was considered employer-friendly, although some in the business community questioned whether it left too much room for judicial interpretation. “The Department is disappointed in the decision and will review and evaluate our options with the Department of Justice,” a DOL spokesperson said.

Please click here for more from NSBA on the joint employer rule.