SUMMARY

On September 8, 2020, a federal judge in New York struck down significant portions of the U.S. Department of Labor (DOL) joint employer rule, which had narrowed the situations in which businesses can be held liable for violations under the federal Fair Labor Standards Act (FLSA) related to workers employed by another entity. 

THE UPSHOT

• In January 2020, the DOL issued a new, narrow definition of joint employment under the FLSA that took effect in March 2020.
• The regulation came in the wake of often conflicting court decisions and prior, restrictive guidance from the DOL that had been withdrawn in 2017.
• A federal judge struck down the portion of the joint employer rule that applies to staffing agencies and other similar arrangements, finding the rule was “arbitrary and capricious.”
• The judge also found the joint employer rule conflicted with the important worker protections built into the FLSA.
• The only part of the joint employer rule that remains relates to “horizontal employment,” where one worker has separate employment relationships with several associated businesses.

THE BOTTOM LINE

The DOL may appeal the decision. But in the meantime, employers are left with little administrative guidance on what constitutes a joint employer relationship with a staffing agency or similar entity for purposes of the FLSA and how best to structure their business relationships. Given this uncertainty, employers should look to court decisions in their respective jurisdictions and carefully draft their agreements with third parties to minimize the risk of liability for employee wages and overtime and potential wage violations.

FULL ALERT

Judge Gregory Woods of the United States District Court for the Southern District of New York recently granted summary judgment for the coalition of states that challenged the Department of Labor’s new joint employer rule in the case of State of New York et al. v. Eugene Scalia et al. That rule, as discussed in our prior legal alert, took effect on March 16, 2020, and laid out a four-factor test for determining when two or more business can be held liable for Fair Labor Standards Act (FLSA) violations with respect to their workers. Notably, this four-factor test limited joint employer liability to situations where the entity actually takes action—such as hiring and firing or setting terms of employment or directing the work—with respect to workers who are employed by another entity, such as in the case of many staffing agencies. Under the DOL’s rule, simply reserving the right to take such action is not sufficient. This rule was a significant departure from the view taken by the DOL under prior administrations and included a much narrower set of factors compared to what courts had previously considered.

In granting summary judgement to the various state attorneys general, Judge Woods found that the DOL’s joint employer rule was “arbitrary and capricious,” particularly because the DOL did not justify why it departed from the prior rule. He explained that the DOL should have explained why it was changing the rule. He further opined that the DOL failed to consider the cost to workers. This was problematic, because the DOL “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.” Without that analysis, Judge Woods ruled that the rule was “legally infirm.”

Judge Woods also found that the joint employer rule conflicted with the FLSA’s definitions. The FLSA definitions of “employer” and “employ” are very broad, yet the joint employer rule was “impermissibly narrow.” By requiring that employers actually exercise one of the four factors, rather than merely reserving the right to do so, the joint employer standard conflicted with the breadth of the text of the FLSA.

Through his ruling, Judge Woods vacated the portion of the joint employer rule related to “vertical” employment relationships. Vertical employment relationship are ones in which workers are employed by a middle-man, like a staffing company, and then are contracted out to work at another business. However, Judge Woods allowed the portion of the rule related to “horizontal” relationships to stand. Horizontal relationships are those where a worker has a separate employment relationship with at least two associated businesses.

The decision is being criticized by the business community as an attack on the franchise business model. An appeal, either by the DOL or business groups that intervened in the suit, seems likely. Until the litigation is resolved, employers with staffing agency and other similar agreements who are seeking to avoid potential joint employer liability should look to court decisions in their respective jurisdictions for guidance.