Is Invalidation of the DOL’s Joint Employer Rule Much Ado About Nothing?

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Seyfarth Synopsis: Much has been written in the past few weeks about a recent federal court decision that invalidated the U.S. Department of Labor’s (“DOL”) joint employment rule. While the immediate reaction of some may be to view this as a terrible decision for businesses that expands the potential for an entity that does not employ an individual to nonetheless be deemed that individual’s joint employer, this reaction may overstate the decision’s importance for putative joint employers.

The rule at issue is 29 C.F.R. § 791.2, which the DOL amended in January of this year, and which 18 states sought to enjoin through a lawsuit brought in the U.S. District Court for the Southern District of New York. The court invalidated the new rule with respect to “vertical joint employment,” which refers to situations in which the employee has an employment relationship with one employer but a separate company also benefits simultaneously from the work of the employee, often through a contract with the direct-employing entity. The court reasoned that the DOL’s new rule for vertical joint employment was essentially the same as the common law control test for joint employment. This purported similarity, the court said, was proof that the DOL’s new test was impermissibly narrow because Congress intended the scope of employment under the FLSA to be very broad.

The court also found that the DOL had departed from its earlier non-binding interpretations of vertical joint employment issued by the DOL during President Obama’s administration without sufficient explanation of why those interpretations were wrong in conflating the “economic realities” case law on joint employment with “economic dependence.” In the court’s opinion, the focus of the joint employer test should be on economic dependence, with all factors that were designed for the independent contractor test incorporated into the joint employer test. While the court’s view may have academic appeal by simplifying the “economic realities” test and combining the independent-contractor and joint employment tests into one, it is not a pragmatic or fair approach. Too many factors under the independent contractor test would point to a joint employment finding in virtually every contractual relationship through which one company benefits from work performed by the workers of another company. By way of example only, whether an individual works permanently or indefinitely for a single company or instead performs project-based work for multiple different companies and whether that individual has the opportunity for profit and loss in the performance of the work have been deemed relevant factors in determining whether the individual should be classified as an employee or an independent contractor. These same factors would always, and often wrongly, point to joint employment status if they played a key role in the joint employer entity. Naturally, an individual who is employed fulltime by his employer on an hourly basis without the opportunity for profit or loss is economically dependent on his employer; that does not mean he is jointly employed by another entity that benefits from his long-term, hourly-based relationship with his employer.

Perhaps more perplexing still is the court’s ultimate determination that Congress’s intended meaning of a joint employer for purposes of the FLSA is clear from the language of the Act itself and that the DOL’s interpretive rule is clearly at odds with that intent. Before reaching this conclusion, the court summarized eighty years’ worth of differing interpretations of the joint employer standard, suggesting that it is not at all clear to most courts how Congress intended to define a joint employer.

Irrespective of whether the court’s decision is right about what the joint employment standard is or should be, the ultimate question for putative joint employers is what impact it will have on their contractual relationships with the actual employers of workers and the threat of future litigation over those relationships. As the court’s decision acknowledges, the 2020 amendments to 29 C.F.R. Part 791 offered nothing more than a clarification of the DOL’s interpretation of the joint employer standard; the rule was merely the DOL’s guidance to employers and employees, not a regulation establishing new law, and thus is entitled Skidmore deference. This means that even if the court had not taken the rare step of enjoining the DOL’s new joint employer rule, each subsequent court with a joint employer case before it could have decided for itself whether to deem the rule persuasive because the DOL’s rule was not a controlling regulation with the force of law. It remains to be seen whether the DOL will appeal the Court’s decision to the Second Circuit.

Thus, despite the court’s decision to “vacate” much of 29 C.F.R. § 791.2, putative joint employers are in essentially the same position in which they found themselves before this decision: without a DOL regulation that carries the force of law and with federal court decisions on the joint employer standard that vary by jurisdiction, to say nothing of the various state wage-hour law standards for joint employer that may call upon different factors than the federal test under the applicable federal circuit’s common law.

Of course, businesses concerned about the possibility of being deemed joint employers would be wise to exercise particular caution in the 18 states that brought the lawsuit against the DOL to enjoin its amendments to the joint employer rule. The states who sued did so on the ground that it would cause them to issue new guidance at a state level to explain their different view of joint employment and ensure they have more than one pocket from which to seek taxes in the event that the actual employer fails to properly classify its workers as employees and properly pay them.

But perhaps most important of all for putative joint employers to remember is that the arguments the DOL made in its interpretive rule for considering some factors and not others to be part of the joint employer standard were largely based on existing case law and thus remain available to businesses in defending against joint employer litigation, separate and apart from the DOL’s vacated rule. And these arguments may still be deemed persuasive by other judges.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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