Department of Labor’s “Joint Employer” Rule Is Struck Down

September 11, 2020
On September 8, 2020, the Honorable Gregory Woods of the U.S. District Court for the Southern District of New York struck down most of the “joint employer” rule issued by the Department of Labor (“DOL”) in January 2020.  The court held that the DOL’s adoption of significant portions of the rule, which limited the situations in which two or more persons or entities may be held liable for violations of the wage-and-hour provisions of the federal Fair Labor Standards Act (“FLSA”), was “arbitrary and capricious” and that the rule conflicted with the FLSA. 

The “joint employer” rule was issued on January 16, 2020 and took effect on March 16, 2020, and impacted “vertical joint employment” relationships, in which employees of an intermediary, such as a staffing company, are contracted to another entity.  The rule set forth a four-part test for identifying whether a person or entity may be held liable as a “joint employer” for violations of the wage-and-hour provisions of the FLSA.  If two or more people or entities are “joint employers” under the FLSA, they are jointly liable to employees for, among other things, wages and overtime pay. 

That four-part test would impose liability under the FLSA on a person or entity as a joint employer “only if that person is acting directly or indirectly in the interest of the employer in relation to the employee.”  29 C.F.R. § 791.2(a)(1).  The relevant considerations under the test are whether an alleged joint employer:  (1) “hires or fires the employee”; (2) “supervises and controls the employee’s work schedule or conditions of employment”; (3) “determines the employee’s rate and method of payment”; and (4) “maintains the employee’s employment records.”  Id.  The rule requires the potential joint employer to “actually exercise – directly or indirectly – one or more of these indicia of control to be jointly liable under the” FLSA.  Id. at § 791.2(a)(3).  According to Judge Woods, “control is the touchstone of the joint employer analysis” under the rule.  New York v. Scalia, 2020 WL 5370871, at *5 (S.D.N.Y. Sept. 8, 2020).

In reaching his decision, Judge Woods noted that it was “axiomatic that any Department interpretation of the FLSA must begin with the text of the statute” and found that the rule was inconsistent with the FLSA in a number of ways.  Id. at *16.  For example, Judge Woods concluded that the rule “applies different tests for ‘primary’ and ‘joint’ employment,” even though “[t]he FLSA does not separately define a ‘joint employer.’”  Id. at *17.  However, according to the text of the FLSA, “[j]oint employment arises because multiple entities may simultaneously satisfy the FLSA’s definition of ‘employer,’” so there is “no independent test for joint employment under the FLSA.”  Id.

In addition, Judge Woods found that the rule converted the FLSA’s text mandating that an employer “includes any person acting directly or indirectly in the interest of an employer in relation to an employee” into a requirement of direct or indirect action to meet the joint employment standard.  Id. at *18.

Finally, Judge Woods concluded that the rule’s focus on control conflicted with the FLSA’s rejection of “the common-law definition of employment, which is based on limiting concepts of control and supervision,” and instead “defines the term ‘employ’ expansively to mean ‘suffer or permit to work.’”  Id. at *26.  Because the rule defined joint employment consistent with the common law definition of “employment” instead of the FLSA’s broader definition, Judge Woods found that the rule “is impermissibly narrow.”  Id.

The rule represented the first rulemaking by the DOL on the joint employment standard under the FLSA since the 1950s.  In 2016, under the Obama administration, the DOL issued guidance calling for joint employment to be considered “expansively” and “as broad as possible.”  The next year, the DOL rescinded that guidance after President Trump took office.  The “joint employer” rule issued in January 2020 was considered a key initiative of the Trump administration’s workplace policy reform.

The DOL has not announced whether it will appeal Judge Woods’s decision.  Until the decision is reversed on appeal or a new rule is adopted, courts may apply their pre-existing joint employer tests.  A number of circuit courts of appeal—including the First, Third, Fifth and Seventh—currently apply tests similar or identical to the test from which the DOL derived its rule.  The Second Circuit, however, has rejected that test, finding that it “cannot be reconciled” with the language of the FLSA and has adopted a broader, six-part test that permits a court to find joint employment when “an entity has functional control over works even in the absence of [] formal control[s].”  Zheng v. Liberty Apparel Co. Inc., 355 F.3d 61, 69, 72 (2d Cir. 2003).