A New York federal district court judge has struck down significant portions of the U.S. Department of Labor’s (“DOL”) joint employer rule, which went into effect earlier this year.  As a result of this ruling, certain companies may be more likely to be deemed joint employers and exposed to liability for wage and hour violations under the Fair Labor Standards Act (“FLSA”).

As we described here, in March 2020, a final rule issued by DOL went into effect implementing a four-factor test for determining whether more than one entity may be considered an individual’s employer under the FLSA.  The new test shifted the existing rule’s focus on the “economic realities” of the alleged employer/employee relationship to a narrower inquiry regarding whether the alleged employer actually exercised control over the alleged employment relationship.

The District Court for the Southern District of New York has now held that DOL’s final joint employer rule violated the Administrative Procedures Act for two reasons.  First, the court found that the rule contradicted the text of the FLSA because it ignored relevant concepts defined in the statute, such as the definitions of “employ” and “employee,” and that DOL had erroneously applied different standards for “primary” and “joint” employment when no such distinction exists in the FLSA itself.  Second, the court found that DOL’s reasoning for the rule change was arbitrary, capricious, and not supported by adequate evidence.

As a result, the court struck down the portion of the rule that related to “vertical” employment relationships, in which an employing entity uses some intermediary employer, such as a staffing agency, to provide labor.  The court kept in place the new rule’s non-substantive revisions for finding joint employment in a “horizontal” employment relationship, defined as a scenario in which “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; the jobs and the hours worked for each employer are separate, but if the employers are joint employers, both employers are jointly and severally liable for all of the hours the employee worked for them in the workweek.”

It is possible that business groups that had intervened in the litigation, as well as DOL itself, will appeal the ruling.  In the meantime, the joint employer rule for vertical employment relationships reverts to the prior standard, which involved a wider range of potentially relevant factors, and which has been subject to significant interpretation both by DOL and through case law.  Employers who have relied on the four-factor test to assess their potential liability as a joint employer should consider reevaluating those assessments in light of this ruling.

Employers should also keep other joint employer liability standards in mind.  For example, in April 2020, the National Labor Relations Board reinstated a joint employer rule that had been previously applied for several decades before it was broadened in 2015.  Additionally, the Equal Employment Opportunity Commission has signaled that it intends to clarify its own standards for determining joint employment status under various federal anti-discrimination laws.  State laws may also vary in their approach to assessing joint employer status.  To manage these risks, employers should continue to carefully monitor their relationships and contracts with other entities to understand how their interactions with various workers may create joint employer liability under applicable labor and employment laws.

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Photo of Carolyn Rashby Carolyn Rashby

Carolyn Rashby provides business-focused advice and counsel to companies navigating the constantly evolving and overlapping maze of federal, state, and local employment requirements. She conducts workplace investigations and cultural assessments, leads audits regarding employee classification, wage and hour, and I-9 compliance, advises on…

Carolyn Rashby provides business-focused advice and counsel to companies navigating the constantly evolving and overlapping maze of federal, state, and local employment requirements. She conducts workplace investigations and cultural assessments, leads audits regarding employee classification, wage and hour, and I-9 compliance, advises on employment issues arising in corporate transactions, and provides strategic counsel to clients on a wide range of workplace matters, including harassment and #MeToo issues, wage and hour, worker classification, employee accommodations, termination decisions, employment agreements, trade secrets, restrictive covenants, employee handbooks, and personnel policies. Her approach is preventive, while recognizing the need to set clients up for the best possible defense should disputes arise.

Photo of Tom Plotkin Tom Plotkin

Tom Plotkin advises clients on a range of domestic and international labor and employment issues. His domestic practice focuses on hiring and firing, discrimination, harassment, whistleblower, wage and hour, trade secrets, non-competition, and other issues arising under federal and state employment laws. His…

Tom Plotkin advises clients on a range of domestic and international labor and employment issues. His domestic practice focuses on hiring and firing, discrimination, harassment, whistleblower, wage and hour, trade secrets, non-competition, and other issues arising under federal and state employment laws. His international practice involves assisting companies in developing strategies and policies for managing cross-border workforces.

Mr. Plotkin also focuses on a number of cutting edge issues at the intersection of employment law and workforce management. As part of Covington’s Business and Human Rights Initiative, Mr. Plotkin assists companies in complying with global laws aimed at monitoring forced and trafficked labor in international supply chains. He also frequently partners with white collar colleagues to conduct internal workplace culture assessments and audits in the wake of the #MeToo movement.