"Joint Employer" Status in the Wage and Hour Context

A New York federal court has struck down a Final Rule from the U.S. Department of Labor (DOL) that set out a four-factor test to determine “joint employer” status, which focused mainly on the putative employer’s level of control over the employee. DOL issued the Final Rule addressing “joint employers” under the Fair Labor Standards Act (FLSA) in January 2020, and on September 8, the Southern District of New York invalidated the rule, holding it “conflicts with the FLSA” and “is also arbitrary and capricious” under the Administrative Procedure Act (APA). New York v. Scalia, No. 1:20-CV-1689-GHW, (S.D.N.Y. Sept. 8, 2020).

This analysis provides the backdrop against which this Final Rule was published, showing a brief history of the “joint employer” test. It then considers the Final Rule and the SDNY’s holding. And finally, it gives a thought toward the future and the effect this rejection of the Final Rule might have on employers.

The History of the “Joint Employer” Test

DOL has recognized the “joint employer” doctrine since 1939, when it first issued a bulletin stating multiple employers could simultaneously employ the same employee. That statement became more refined through the years, with the Supreme Court recognizing the doctrine in Falk v. Brennan, 414 U.S. 190 (1973), and DOL issuing regulations in 1997 that solidified the “joint employer” test as one of “economic dependence” and not the traditional common law control test.

These definitions were reaffirmed in 2014 and 2016, after DOL again issued regulations, and again wrote that the “joint employer” test hung on the “economic reality” between the putative employer and employee, and not the level of control the putative employer exercised. DOL based these regulations in the FLSA definitions of “employ,” “employer” and “employee” and on the mounting case precedent holding the test was not a control test.

DOL’s Final Rule

Into this world DOL issued its Final Rule. The big change of the Final Rule was to establish the “joint employer” test as one of control and not one centered on the economic relationship between employer and employee.

The Final Rule set forth four factors to consider: whether the employer "(i) hires or fires the employee; (ii) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; (iii) determines the employee’s rate and method of payment; and (iv) maintains the employee’s employment records.” 29 C.F.R. § 791.2(a)(1)(i)-(iv).

Critically, the Final Rule made explicit that economic relationship was now irrelevant to the “joint employer” test. 29 C.F.R. § 791.2(c). (“Whether the employee ... economically depend[s] on the potential joint employer is not relevant[.]”).

In defense of this change, DOL offered 29 U.S.C.A. § 203(d) as support, which defines “employer” as including “any person acting directly or indirectly in the interest of an employer in relation to an employee.” As for the practical reasons underpinning the new test, DOL cited the diverging, inconsistent and confusing standards for “joint employer” that had populated appeals courts in recent years.

The Court’s Opinion

The Southern District of New York had two main holdings. First, it held the Final Rule “contradict[s] the text of the FLSA, prior Department interpretations of the FLSA and the MSPA, and caselaw from the Supreme Court and lower courts.” Second, it held the Final Rule was “arbitrary and capricious” in violation of the APA.

Regarding the first holding, the Court found the text of the FLSA inextricably linked the definitions of “employer,” “employee” and “employ” by including each term within the definition of the other. Critically, these definitions utilize the “suffer or permit to work” standard, which establishes a broader definition of “employer” than the four-factor test proposed in the Final Rule.

Regarding the second holding, the Court stated that “the Department did not adequately explain why it departed from its prior interpretations,” nor did it “adequately consider the Final Rule’s cost to workers.”

“Joint Employer” Test and the Holding Going Forward

Many businesses traditionally affected by the “joint employer” test, such as franchisors and contractors, have called the opinion a setback. No doubt, DOL's proposed four-factor control test set out a stricter definition of “joint employer,” which would have made it harder for absent employers that handle the money but not the control to become “employers” under FLSA. But in any event, with the Final Rule struck down, the “economic reality” standard and the various Circuit decisions remain in place.