Q: What does the latest decision on joint employer liability mean for businesses?

A: On September 8, 2020, the United States District Court for the Southern District of New York issued a decision overturning the U.S. Department of Labor’s (DOL) March 2020 Final Rule, which had adopted a narrow four-factor test for determining joint employer liability in “vertical” employment relationships, such as contractor/subcontractor, franchisor/franchisee and company/staffing agency relationships. The test set forth in the Final Rule looked at whether the putative joint employer (i) hires or fires the employee; (ii) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; (iii)  determines the employee’s rate and method of payment; and (iv) maintains the employee’s employment records. These factors looked to the degree of control as the standard for determining joint employment, which was a sharp departure from prior DOL guidance which looked more broadly at the economic dependence between the parties.

In New York v. Scalia, Docket No. 20-CV-01689 (S.D.N.Y. 2020), seventeen states and the District of Columbia brought suit, claiming that the Final Rule conflicted with the plain text of the  Fair Labor Standards Act (FLSA) and violated the Administrative Procedures Act (APA).  The Court agreed, granting summary judgment invalidating the Final Rule.

The Court found that the Final Rule was an incorrect interpretation of the text of the FLSA in several important ways.  First, the Court held that the DOL erred in relying solely on the FLSA’s definition of “employer,” rather than also considering the FLSA’s more expansive definitions of “employee” and “employ,” stating that such an interpretation “stumbles out of the starting gate.”  Second, the Court found that the DOL’s attempt to apply different tests for “primary” and “joint” employment “create[d] interpretative riddles.”  According to the Court, there is no independent test for joint employment.  Rather, entities are joint employers if they both meet the definition of “employer.”   Third, the Court determined that the DOL incorrectly ignored that the FLSA’s definition of “employer” was “illustrative, not exhaustive,” as the definition stated that it “includes any person acting directly or indirectly in the interest of an employer in relation to an employee,” rather than defining an “employer” to “mean any person acting directly or indirectly in the interest of an employer in relation to an employee.” Fourth, the Court stated that the Final Rule’s four-factor test ignored Congress’ intent in expanding the joint employer liability by broadly defining “employ” as to “suffer or permit to work.”

While the Court noted that the four factors in the Final Rule’s control test were relevant to the joint employer inquiry, the Final Rule’s conclusion that one or more of the control factors was a necessary condition for an entity to qualify as a joint employer contradicted the plain meaning of the FLSA.

The Court also found that the Final Rule was “arbitrary and capricious” in violation of the APA.  That is, the Court stated that the DOL did not adequately explain why it departed from its prior interpretations.  Also, it did not consider the conflict between the Final Rule’s narrow control-based standard and the economic reality standard for joint employer liability under the Migrant and Seasonal Agricultural Workers Protection Act (MSPA), which mirrors the language of the FLSA.  Finally, the Court held that the Final Rule was arbitrary and capricious because it did not adequately consider the cost to workers caused by the reduction in the number of joint employers under the control test.  The Court called the Final Rule’s assumption that all employers fulfill their legal obligations as “silly,” stating that “employers do not uniformly fulfill their legal obligations.  That is the whole point of joint employer liability:  Workers can recover from a joint employer when their primary employer flakes on its legal obligations.”  The Court concluded:

[T]he [DOL] must do better than this.  Any future rulemaking must adhere to the text of the FLSA and Supreme Court precedent.  If the [DOL] departs from its prior interpretation, it must explain why.  And it 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.  Because the Final Rule does none of these things, it is legally infirm.

Notably, the Court left in place the Final Rule’s “non-substantive” revisions to existing law for horizontal joint employer liability.  Horizontal joint employment relationships are less common, occurring when an employee has an employment relationship with two or more employers who are sufficiently associated to give rise to joint employment liability.  Three factors determine horizontal joint employer liability:  (1) whether there is an arrangement between the employers to share the employee’s services; (2) whether one employer is acting directly or indirectly in the interest of the other employer in relation to the employee; and (3) whether they share control of the employee, directly or indirectly, by reason of the fact that one employer controls, is controlled by, or under common control with the other employer.

Take Away

The Court’s decision is a setback for the businesses community, particularly franchisors, contractors, and companies that outsource workers who were less likely to be found to be joint employers under the Final Rule.  The decision is likely to face appeal.  In the meantime, companies should be careful not to rely solely on the more narrow control test in determining potential liability as a joint employer.