Earlier in 2020, we discussed the Department of Labor’s (“DOL”) four-factor test for determining whether an entity could be considered a “joint employer” of an individual even if it is not the entity that payrolls that individual. Under that test, the DOL will consider whether the non-payrolling entity: (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 DOL’s final regulation made clear that it was not enough for an individual to simply show that he or she was economically dependent on the putative joint employer in order to be able to sue that entity as a joint employer under the Fair Labor Standards Act (“FLSA”).
While this new rule was a positive development for entities that wanted to avoid joint employment status, we did caution our readers that there was a fair chance that it would be challenged in the courts. As it turns out, fifteen states joined together and filed a lawsuit in a New York federal court seeking to invalidate the rule on grounds that it was arbitrary and capricious and contrary to the law.
On September 9, 2020, the court sided with the states, ruling that the DOL’s final rule was contrary to law because it impermissibly narrowed the FLSA’s definition of who could be an “employer.” In the court’s view, an entity could be a joint employer if, among other things, a worker was “economically dependent” upon the entity to which he or she sought to assign joint employer status. The court also held that DOL’s final rule was arbitrary and capricious because it represented a departure from agency precedent for which DOL failed to provide adequate justification.
The long-term effect of this new ruling is unclear. For one, the DOL has not yet determined whether it will appeal the decision to the Second Circuit. Additionally, courts in other circuits are not bound by the ruling, and courts have issued different rulings that typically rely on fact-specific analyses when evaluating whether joint employment exists for purposes of FLSA liability. Finally, if there is a change in administration after the November elections, then the “joint employer” guidance seems likely to be revisited, as Joe Biden has already proposed codifying an “economic realities” joint employer test under the National Labor Relations Act.