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.