17 September 2021 - Article
On September 8, 2020 the United States Southern District Court of New York issued a much-anticipated decision striking down the narrowly tailored Joint-Employer Final Rule of the Department of Labor, which was issued under the Trump administration in January. The Joint-Employer concept, which has been recognized since 1939, permits more than one entity to be jointly and severally liable for violations of law, in particular the Fair Labor Standards Act, which governs wages and hours of workers. The decision struck down the rule with regard to “vertical relationships” in which workers are employed by a middle-man and contracted out to work at another business, but left “horizontal relationships” in which a worker has separate employment relationships with associated businesses.
Challenged by 17 states but supported by many large organizations who rely on franchises and outsourcing, the new rule created a four-part test to determine joint-employer status, assessing only whether the organization had authority to (1) hire or fire the employee; (2) supervise and control the employee’s work schedule or conditions of employment to a substantial degree; (3) determine the employee’s wages and method of payment; and (4) maintain the employee’s employment records. Although no factor was determinative, the new rule set aside Obama administration guidance that determination of a joint-employer relationship should instead focus on the “economic realities” of the employment relationship and the company’s influence and control over the workplace. The Plaintiff-States argued that the new rule would make it harder to hold companies liable for violations of wage and hour laws, especially franchisors and contractors.
The 62-page decision by Judge Woods found that the new rule was in conflict with the FLSA’s broad definitions of employer, employee and employ. Further, he noted that the change appeared to be arbitrary and capricious as it failed to provide good reasons for the new policy choice, offered no reasoned explanation for the change, and failed to address questions raised during the notice-and-comment period.
The Judge rejected the requirement that an entity have to exercise control over a worker to be considered a joint employer, but rather control should be one of the many factors considered. Citing the legislative history of the FLSA, and the purpose of the laws to prevent wage and hour abuses regardless of business formalities, the Court expressed concern that the DOL failed to consider the impact to workers and whether the benefits of the new rule outweighed the costs.
Accordingly, the Court indicated that broader factors than those in the 4-part test, such as economic dependence, or the type of business model used, and the circumstances as a whole must also be considered in the analysis.
While it is likely that this decision will be appealed, organizations engaged in a vertical relationship with a separate organization (i.e. a staffing agency, contractor relationship or other intermediary provider), should take note when assessing their current and future relationships and the potential exposure for liability.