On September 8, a federal judge in the Southern District of New York vacated a portion of the U.S. Department of Labor’s regulations narrowing the scope of “joint employer” status under the Fair Labor Standards Act. According to the decision, issued by Judge Gregory Wood, the regulations violate the Administrative Procedure Act because they are contrary to law, and arbitrary and capricious.

Judge Wood found (1) that the regulations conflicted with the FLSA’s broad definitions; (2) that the DOL failed to adequately support its departure from prior interpretations and did not account for some of the costs of the regulations; and (3) that the DOL’s interpretation was “arbitrary and capricious.”

Background

In January, the DOL issued regulations that narrowed the scope of “joint employer” status under the Fair Labor Standards Act. Seventeen states and the District of Columbia sued, alleging that the regulations violated the APA. The DOL moved to dismiss the lawsuit on the ground that the plaintiffs lacked standing to sue, but Judge Wood found that the states had standing because they established that the regulations would increase their costs in administering and enforcing their state level analogues of the FLSA. Thus, the lawsuit was allowed to proceed, and culminated in Judge Wood’s decision issued on September 8.

In the regulations, the DOL said that an employer could be found to be a joint employer if it

• Hires or fires the employee,

• Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree,

• Determines the employee’s rate and method of payment, and

• Maintains the employee’s employment records.

According to the comment accompanying the regulations, “no single factor is dispositive in determining joint employer status, and the appropriate weight to give each factor will vary depending on the circumstances.”

The regulations also contained the following provisions:

• A franchise relationship, a brand and supply agreement, or a similar business model “does not make a finding of joint employer status more or less likely.”

• Requiring compliance with specific legal standards or health/safety requirements to protect employees or the public, or the monitoring and enforcing of such contractual commitments, “does not make joint employer status more or less likely.” This includes

mandating that employers comply with their obligations under the FLSA or other similar laws; or institut[ing] sexual harassment policies; requiring background checks; or requiring employers to establish workplace safety practices and protocols or to provide workers training regarding matters such as health, safety, or legal compliance. Requiring the inclusion of such standards, policies, or procedures in an employee handbook does not make joint employer status more or less likely under the Act.

• Contractual agreements that require the potential joint employer to maintain quality control standards to ensure the consistent quality of the work product, brand or business reputation, or monitoring compliance with these types of agreements, “does not make joint employer status more or less likely under the Act.”

Judge Wood’s decision

In his September 8 decision, Judge Wood allowed the portions of the joint employer regulations applying to “horizontal” relationships to stand. A “horizontal” joint employer relationship 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.”

However, the judge struck down the regulations as they applied to “vertical” joint employment. According to 2016 guidance from the DOL,

Vertical joint employment exists where the 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.

Judge Wood found that the regulations pertaining to vertical joint employment were contrary to law.

First, he found that the regulations contradict the text of the FLSA by basing “joint employment” solely on the FLSA definition of “employer.” According to Judge Wood, “employer” cannot be defined without consideration of the statutory definitions of “employ” and “employee,” as well. The definition of “employ” includes “suffer[ing] or permit[ting]” to work. (The significance of this is discussed below.) Although the DOL recognizes that the three definitions are interrelated, the regulations provide that only the definition of “employer” applies in determining whether an entity is a joint employer. Judge Wood said, “This interpretation stumbles out of the starting gate . . ..”

Next, the regulations apply different standards for determining “primary” and “joint” employment. But, according to Judge Wood, there is no independent test for joint employment under the FLSA. “An entity is an employer if it meets the FLSA’s definition. It is a joint employer if it meets the definition and another entity also meets the definition.”

Third, Judge Wood said, the regulations fail to recognize that the FLSA’s definition of “employer” is inclusive. The FLSA defines an employer as “including any person acting directly or indirectly in the interest of the employer.” (Emphasis added.) Use of the word “including” implies that persons not acting directly or indirectly in the interest of the employer might also be “employers.” Judge Wood noted, “The definition is not exhaustive. It clarifies that an entity can be an employer even if the employee is also in an employment relationship with a different employer.”

Finally, the regulations ignored the history of the “suffer or permit” standard found in Section 203(g) of the FLSA. According to Judge Wood, Congress adopted the “suffer or permit” language to prevent businesses from escaping wage-hour liability by contracting with sweatshops. That is, Congress “extended liability to parties that ‘permitted’ wage violations to target these abusive practices…”

Judge Wood also found that the regulations were arbitrary and capricious “for at least three reasons.” First, the DOL did not adequately explain why it had departed from its prior interpretations, issued in 1997, 2014 and 2016, under the Clinton and Obama administrations. Second, the DOL did not consider or address the conflict between its regulations and the Migrant and Seasonal Agricultural Protection Act regulations, which “could lead to increased costs for employers subject to both standards.” Third, the regulations did not “adequately consider the Final Rule’s cost to workers.” The DOL had acknowledged that the new regulations “may reduce the number of businesses found to be joint employers, and that that might reduce the amount of back wages that employees could collect when their primary employer does not comply with the FLSA.” According to Judge Wood, “even if the ‘exact harms are difficult to predict,’ the agency may not ‘disregard an effect entirely.’”

What now?

Judge Wood’s decision will be binding on the parties to the litigation but not upon any other federal court. Other district courts are free to follow it or ignore it.

Joint employer decisions are often dependent on law from the U.S. Courts of Appeal rather than regulations from the DOL. Some courts, like the U.S. Court of Appeals for the Fourth Circuit, have a very liberal interpretation of joint employer status (meaning that two or more entities are reasonably likely to be found to be joint employers), while others follow the standard used in the DOL regulations and a 1983 decision from the U.S. Court of Appeals from the Ninth Circuit (which make a finding of a joint employer relationship less likely). In circuits where there is no relevant appeals court decision, some lower courts follow and apply the DOL regulations while others may not.

The DOL is likely to appeal to the U.S. Court of Appeals for the Second Circuit, but whether the appeal continues will depend on the outcome of the November elections. If Vice President Joe Biden is elected, the DOL will almost certainly drop the appeal and issue joint employer regulations more consistent with the 1997, 2014, and 2016 guidance. If President Trump is reelected, the DOL is likely to pursue an appeal through the Second Circuit and, if unsuccessful there, to seek review by the U.S. Supreme Court.