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Court Vacates DOL Joint Employer Rule

Oct. 7, 2020
A victory for activist Democrat state attorneys general, the decision creates uncertainty for employers.

A New York federral district court judge has overturned the rule issued by U.S. Department of Labor (DOL) applying a new test for determining joint employer status that had gone into effect in March. The decision impacts employers nationwide.

Suing to overturn the rule were the Democrat attorneys general of 17 states and the District of Columbia, and handing down the decision was U.S. District Court Judge Gregory Woods, an Obama appointee. His decision represents the latest battle in the ongoing war over joint employment status, which labor unions view as a powerful weapon for organizing employees, such as those of franchise chains like McDonald’s restaurants.

While it is possible that DOL will try to reissue the rulemaking, rewriting it in such a way as to address the judge’s criticisms, legal observers believe it is more likely that the department will instead choose to appeal the decision to the Supreme Court.

“This decision is yet another important data point showing the critical role that AGs are playing in our country’s economic recovery and also demonstrates how these critical regulators will impact the labor relations landscape going forward,” explains attorney Paul Connell of the law firm of Reed Smith LLP. “Judge Woods’ ruling presents an important opportunity for companies to review current relationships with workers whom they do not directly employ but from whom they receive some type of beneficial service,” he suggests.

Over the years, various federal agencies have staked out different positions on joint employment depending on what kind of regulatory standards are being applied—many times based on whether the then-current Administration is more pro-union or more pro-business.

An exception is the Occupational Safety and Health Administration (OSHA), which has long held that joint employers, such as staff leasing firms and their corporate customers, share responsibility for those employees’ safety compliance. However, the National Labor Relations Board under President Trump has narrowed the definition of joint employer in regard to labor regulation after the board under President Obama took a different stance.

In the new DOL rule a new control test was instituted for determining whether a company could be a joint employer of another company’s employees under the terms of the Fair Labor Standards Act (FLSA). To be considered a joint employer, a company had to hire or fire the employee; supervise and substantially control the employees’ work schedules; determine employee pay and payment method; and maintain workers’ employment records.

Vertical vs. Horizontal

“Joint employment status is an important and frequently litigated issue because under the FLSA, joint employers are jointly and severally liable for all wages due to an employee for all hours worked for either entity,” note attorneys Susan Harthill and Leni D. Battaglia of the Morgan Lewis & Bockius law firm.

The judge’s decision vacated major portions of the rule based on what are basically procedural grounds, charging DOL with failing to meet its regulatory obligations under the Administrative Procedures Act (APA), which lays out the steps federal agencies need to take when promulgating new regulations and formal policy statements.

Vacated by the judge are the parts of the rule that apply to what is called “vertical” joint employment, including the four-part test. He found the rule contrary to law because joint employer liability was based only on the FLSA definition of “employer,” ignoring the FLSA’s text and Supreme Court and lower court precedent that define joint employer liability under interrelated definitions: employer, employee, and most significantly, “employ.”

The judge also said the rule violated the APA by being “arbitrary and capricious” (a common legal phrase) because DOL did not explain why it departed from the Obama department’s prior guidance or why it conflicted with the regulations imposed under a sister statute, called the Migrant and Seasonal Agricultural Workers Protection Act, and did not adequately consider the costs to workers.

If you are tempted to think that the judge was nitpicking and may have been too clever by half, you aren’t alone, especially since his decision doesn’t mean the joint employer standard will revert to the Obama-era rule, but instead to a standard that is more than 60 years old.

Because the department already has withdrawn the Obama-era DOL joint employer rules, that means they cannot represent the default position from the vacated Trump-era rules, which means instead that the rules in effect are those that DOL had set previously in 1958, according to Harthill and Battaglia.

The 1958 rule held that multiple persons can be joint employers of an employee if they are “not completely disassociated” with respect to the employment of the employee. This standard, combined with court decisions and administrative interpretations requiring the application of multifactor tests, resulted in widespread confusion for employers, the attorneys point out.

They urge companies that relied on DOL’s new control test to restructure their business relationships after consulting with legal counsel about the applicable law because the federal circuit courts have applied different, multifactor tests, and state laws may vary as well.

“Companies should remain diligent to ensure that vendors, franchisees, and other business partners determine rates, methods of pay, and how, when and where work will be performed, in addition to applying other factors depending on where they operate,” Harthill and Battaglia conclude.

Judge Woods allowed the portion applying to a “horizontal” joint employment relationship to remain in effect. Under that definition, two employers are separate unless there is an agreement to share the employee’s services; one employer acts directly or indirectly in the interest of the other in relation to the employee; or employers share control of the employee, directly or indirectly, because one employer controls, is controlled by, or is under common control with the other employer.

Regardless of whether DOL decides to appeal the judge’s decision to the Supreme Court or attempts to rewrite the rules, the upcoming national election will determine the future of joint employer status as defined and enforced by federal agencies. If Trump wins, expect more progress along the line of DOL and NLRB’s actions. If Joe Biden wins, the new Administration will switch back to the pro-union approach that dominated the Obama era.

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