Federal Court in Manhattan Vacates Key Part of USDOL’S Final Rule on Joint Employer Status

On September 8, 2020 U.S. District Court Judge Gregory H. Woods in Manhattan granted partial summary judgment to 17 states and the District of Columbia striking down a major part of the Department of Labor’s Final Rule on vertical joint employer relationships. The Final Rule issued in January and imposed a four-factor test to decide which businesses can be held liable under the FLSA for unpaid minimum wages and overtime pay owed to a worker. The central component of the test that Judge Woods vacated focuses on control – i.e., a business that controls the worker is liable for any wage and hour violations arising from the employment relationship even though the business does not employ the worker. Judge Woods found the four-factor control test impermissibly narrow, inconsistent with the purposes of the FLSA, Supreme Court precedent, and previous Administrative Interpretations of joint employer liability, and a violation of the Administrative Procedures Act. Bottom line, if Judge Woods’ decision stands, simply arguing that the business did not control the worker’s activities will not alone defeat a claim of joint employer liability under the FLSA. New York v. Scalia, Docket No. 20-cv-1689 (GHW)(Sept. 8, 2020). Judge Woods also granted the DOL’s motion for summary judgment in part, upholding the portion of the Final Rule that deals with horizontal joint employer relationships.

BACKGROUND

The FLSA requires covered employers to pay employees at least the federal minimum wage for every hour of work and overtime for every hour over 40 hours worked in a workweek unless the employee is exempt from minimum wage or overtime requirements. An employer includes “any person acting directly or indirectly in the interest of an employer in relation to an employee.” 29 U.S.C. §203(d). Under Department of Labor regulation 29 C.F.R. §791.2, the DOL has recognized that an employee can have multiple employers each of which is jointly responsible for the employee’s wages in three circumstances:

1. when there is an arrangement to share the employee’s services;
2. when the employee acts directly or indirectly for the interest of the employer;
3. where the employers are not completely dissociated regarding the employment of the particular employee, where it can be deemed that they both share control of the employee.

DOL FINAL RULE

On March 16, 2020 the Final Rule on joint employer status took effect, amended 29 C.F.R. 791.2, and describes two scenarios to which the Final Rule applies – vertical joint employment, and horizontal joint employment. Vertical joint employment assumes “the employee has an employer who suffers, permits, or otherwise employs the employee to work. . . but another employer simultaneously benefits from that work.” The Final Rule states that a business is in a vertical joint employment relationship if the business:

1. Hires or fires the employee;
2. Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
3. Determines the employee’s rate and method of payment; and
4. Maintains the employee’s employment records.

By contrast, in a horizontal joint employment relationship, “one employer employs a worker for one set of hours in a workweek, and another employer employs the same worker for a separate set of hours in the same workweek.” In this case the “jobs and the hours worked for each employer are separate.” If the employers are determined to be joint employers of the employee, then all of the hours worked for the two employers are combined for the workweek, and “both employers are jointly and severally liable for all of the hours the employee worked for them in the workweek.” The factors listed in the Final Rule to determine horizontal joint employer status are as follows:

1. There is an arrangement between the two businesses to share the employee's services;
2. One employer is acting directly or indirectly in the interest of the other employer in relation to the employee; or
3. They share control of the employee, directly or indirectly, by reason of the fact that one employer controls, is controlled by, or is under common control with the other employer.

JUDGE WOODS’ DECISION

The lawsuit asked the Court to vacate the Final Rule, enjoin its implementation, and alleged that the Final Rule narrows the circumstances in which employers can be required to pay for overtime pay and minimum wages. Judge Woods first addressed the portion of the regulation dealing with vertical joint employment relationships and found that the regulation was “arbitrary and capricious,” and contravened the protective purposes of the FLSA by narrowing the circumstances in which employers can be joint employers by imposing a control test. A review of existing case law and previous Administrative Interpretations regarding joint employer liability, according to Judge Wood, makes clear that the test to determine joint employer status is not exclusively a control test, but also includes an inquiry into the economic realities of the relationship between the worker and the business that benefits from the services. For instance, the 2014 Administrative Interpretations noted “that a set of factors that addresses only control is not consistent with the breadth of employment under the FLSA.” Judge Woods also cited the DOL’s 2016 Administrative Interpretation which stated that the test for joint employment “is not a control test.” Commenting on the dearth of legal authority for the DOL’s position that the FLSA’s definition of employer is separable from other FLSA definitions and requires a narrow construction, the Court wrote, “Over eighty years later, this dog has yet to bark.”

Turning to the Final Rule’s provisions relating to horizontal joint employment relationships, Judge Woods severed this portion of the Final Rule from the provisions relating to vertical relationships, and permitted this portion to remain in effect because it made only “non-substantive revisions to existing law.”

BOTTOM LINE

Judge Woods’ decision largely maintains the status quo with respect to the test for joint employer under the FLSA and adopts the expansive approach to joint employer status taken by the FLSA, which focuses on the economic realities of the relationship instead of a narrow inquiry into control or applicability of the common law employee test. In view of this decision, to minimize joint employer liability, employers must manage carefully their relationships with persons who provide services and are important to the day to day operations of the business but are not their direct hires.

For more information about the implications of this decision for your business and compliance with the FLSA and state wage-hour laws, please contact John Vreeland, Esq., via email here in the Firm’s Wage & Hour Compliance & Dispute Resolution Practice Group.