Court Blocks Part of Labor Department's Joint Employer Rule

Earlier this year, the Labor Department (DOL) announced a final rule to provide a clearer methodology for determining joint employer status under the Fair Labor Standards Act (FLSA). The rule offered employers clarity and certainty regarding their responsibility to pay federal minimum wage and overtime for all hours worked over 40 in a workweek.

The rule, which became effective in March 2020, was subsequently challenged by 18 states on the grounds that the rule was invalid. On Sept. 8, the federal district court for the Southern District of New York agreed, holding that the part of the rule dealing with vertical joint employment was arbitrary and capricious (there are two joint employer scenarios under the FLSA – vertical and horizontal employment).

The Court offered the following example of vertical employment:

Imagine that an employee works for a contractor. A corporation hires the contractor. The contractor fails to pay the employee the minimum wage, as required by the FLSA. If the contractor and the corporation are the employee's joint employers, the employee can sue both the contractor and the corporation for back wages. In other words, the contractor and the corporation are both on the hook for the employee's damages. But if the contractor and the corporation are separate employers, then the employee can sue only the contractor. Note that the wages due to the employee are the same in either scenario. The joint employment doctrine addresses only from whom the employee may collect damages. Imagine, for example, that the contractor goes bankrupt. If the corporation is her joint employer, the employee can still recover. If not, the employee is out of luck.

Horizontal relationships, which are rarer, involve related entities that employ the same worker.

The Final Rule narrowed the definition of joint employment by requiring actual control. Under the broader interpretations, builders faced uncertainty about what level of necessary oversight and coordination of their subcontractors might trigger joint employer liability. Under the Final Rule, where an employee performed work for the employer that simultaneously benefited another individual or entity, DOL provided a four-part test to determine whether the potential joint employer actually exercised the power to:

• Hire or fire the employee;
• Supervise and control the employee's work schedules or conditions of employment;
• Set the employee's pay rate and method of payment; and
• Maintain the employee's employment records.

In such a case, whether a person was a joint employer would depend on all the facts in a particular case. Additional factors could also be relevant in determining whether another person was a joint employer in this situation, but only when they showed whether the potential joint employer was exercising significant control over the terms and conditions of the employee's work.

It remains to be seen whether DOL will appeal the decision.

It also unclear at this time whether the scope of the decision extends beyond the Southern District of New York to the states that challenged the rule, or even nationwide.

According to published reports, the head of DOL's Wage and Hour Division said the Agency is disappointed in the district court's decision regarding the Joint Employer Rule but that it stands by the Rule and is weighing all options.

According to experts, businesses should evaluate their current arrangements, and companies that relied on DOL's new control tests to restructure business relationships should consult with their attorney as to the applicable law in their jurisdiction because the federal circuits apply different multifactor tests, and state laws may vary. NAHB will continue to monitor developments in the case and provide updates to members.

For more information, contact David Jaffe.