On September 8, 2020, the Southern District of New York struck down a recent Department of Labor (DOL) final rule that changed the standard of joint employment under the Fair Labor Standards Act (FLSA).  The court determined that the rule conflicted with the FLSA and that the DOL did not properly justify the new change in policy.  This decision will expose more companies to potential liability under the FLSA and increase the number of businesses that qualify as joint employers, such as those who use staffing agencies or subcontractors.  Employers affected by the decision should prepare to make changes to their workforce and staffing arrangements.

Brief Background of the Final Rule

When DOL’s final rule went into effect in March 2020, many businesses welcomed it with open arms as it provided some much-anticipated relief from the historically burdensome joint employment determination. Specifically, the final rule created a four-part balancing test to assess whether an entity could be deemed a joint employer. Perhaps more significantly, the DOL specifically articulated several considerations that would not be factored into its joint employment test, including the theoretical ability to control employees (as compared to actual control) and economic dependence. The final rule also continued to recognize two distinct joint employment scenarios, including vertical and horizontal joint employment, and described the standards to determine joint employer status in each scenario. By way of background, vertical joint employment, the more common of the two scenarios, occurs when an employee has a relationship with one company but is economically dependent on another company.  Some examples of this include employment via staffing agencies or a subcontractor relationship.  Horizontal joint employment, on the other hand, occurs when a worker has separate relationships with multiple businesses that are associated with one another. The latter was not significantly changed by the final rule.

Breakdown of the Ruling

The September 8 ruling only struck down the rules for vertical joint employment while keeping intact the standards for the rarer “horizontal” relationships. The decision includes a detailed analysis of why the final rule should be vacated in part. For one, the court explains that the final rule inappropriately adopts a narrow definition of “joint employer” and that narrowing of the joint employment inquiry is not only unlawful, but also contravenes legal precedent and prior DOL interpretations. Additionally, the court explains that the four-factor test under the final rule directly conflicts with the FLSA.

Other problems the judge found with the final rule included the DOL’s decision to base the rule’s definition of “employer” solely on the FLSA definition and the agency’s disregard for the “suffer or permit to work” standard, which determines that an employer is a joint employer if it suffers or permits to work an employee while another employer suffers or permits to work the same employee at the same time. 

According to the court, the DOL’s failure to adequately explain why it departed from its own prior interpretations of the joint employer test and its failure to consider significant resulting costs made the rule “arbitrary and capricious.”

What are the Consequences?

Last week’s decision may be appealed by the DOL or by a coalition of business groups, including the U.S. Chamber of Commerce and the National Retail Federation, which had just recently been approved by the court as an intervening party.

Regardless of DOL’s next steps and until the court’s ruling is overruled, employers in potential vertical joint employment scenarios (for example, those who use staffing agencies or subcontractors) should take note of the decision and be prepared to make changes to workforce and staffing arrangements in reliance of the final rule. If a company has made significant changes to its workforce structure as a result of the final rule, we would recommend reviewing those changes in the context of court decisions in their respective jurisdictions. Should the court’s ruling stand, a failure to abide by the pre-rule standards could lead to grave and serious consequences, including, for example, prime contractors being liable for wage and hour violations by their subcontractors and staffing companies being liable for acts of discrimination by their clients.

PilieroMazza is closely monitoring this case and will provide more guidance as it progresses.  Please contact Nichole Atallah, Sara Nasseri, and Sarah Nash, the authors of this client alert, or a member of PilieroMazza’s experienced Labor & Employment attorneys if you need to understand how this decision may apply to your business and how to ensure proper compliance with current joint employer regulations.