Joint Employer Rule Struck Down by New York Judge

On Tuesday, September 8, 2020, a New York federal judge ruled that the U.S. Department of Labor’s recently enacted “joint employer” rule, which was issued in January, is a violation of federal rulemaking norms.  See New York v. Scalia, 2020 U.S. Dist. Lexis 163498, 1:20-cv-1689-GHW, (S.D.N.Y. September 8, 2020).   The “joint employer” rule provided four-part balancing test to determine joint employer status when essentially one employer employs a worker, but another employer benefits from the workers labor. The four-factor test included a review of whether the business can hire or fire employees, whether it controls their schedules or conditions of employment to a substantial degree, whether it determines workers’ pay rates and the methods by which they are paid, and if it maintains workers employment records.

In a 62 page decision, the Court held that the new rule ignored the broad definitions of the Fair Labor Standards Act and that the Department of Labor had failed to adequately justify its departure from its prior interpretations of the Act.  The Court specifically vacated the portion of the rule that applied to “vertical” employment relationships, which are relationships in which workers for a staffing company or other intermediary are contracted out to another entity. However, it let the portion addressing “horizontal” employment relationships stand. “Horizontal” relationships are those in which a worker is employed by two “sufficiently associated” businesses.

The Fair Labor Standards Act does not explicitly reference joint employment, but the Department of Labor has long recognized that, often, employees have multiple employers. The Department has periodically updated its interpretation of joint employers, as it did this past January. However, as the Court explained, this time its definition clashed with the Fair Labor Standards Act, most importantly in its definition of “employ.”  The Fair Labor Standards Act states that to employ is to “suffer or permit” a worker to work, which the Supreme Court has noted is extremely broad. While the new law defined employer as, “any person acting directly or indirectly in the interest of an employer in relation to an employee.” The Court found the definition to be a plain contradiction of the Fair Labor Standards Act text. Additionally, the Court noted that the rule placed too much emphasis on control and that the Department of Labor did not adequately explain its disregard of evidence that narrowing the test would expose workers to wage theft.

Although there may be appeals, this decision creates issues for employers with vertical employment issues.  While such employers can look to the 2014 and 2016 Administrative Interpretations of the Wage and Hour Division of the Department of Labor, these Administrative Interpretations have been withdrawn by the DOL under the Trump Administration.  Until there is additional guidance through the courts or the Department of Labor, employers may need to look to the regulations codified in 1958 for guidance.   See 23 Fed. Reg. 5905 (Aug. 5, 1958).

If you have questions, you should contact your legal counsel.

About the Author: Meredith R. Farrell

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