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U.S. DOL’s “Joint Employer” Rule Struck Down, Now What?  U.S. DOL’s “Joint Employer” Rule Struck Down, Now What?

U.S. DOL’s “Joint Employer” Rule Struck Down, Now What?

On January 16, 2020, the Wage and Hour Division of the U.S. Department of Labor (“DOL”) published its final rule to revise and update its regulations regarding joint employer status. You can find Ice Miller’s update regarding those regulations HERE. In the final rule, effective March 20, 2020, the DOL announced a four-factor balancing test for determining vertical FLSA joint employer status. The analysis focused on the alleged joint employer’s degree of actual control over an employee and considered whether the alleged joint employer:
  • Hires or fires the employee;
  • Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
  • Determines the employee’s rate and method of payment; and
  • Maintains the employee’s employment records.
Vertical joint employment is employment where an employee works for one employer, but another potential employer simultaneously benefits from the work performed by the employee. For example, if a franchisor grants a franchisee the right to use the franchisor’s name and trademarks, supplies a franchisee with rules and controls with regards to how the franchise operates, mandates rules as to pay, and provides other indicia of control over the franchisee in exchange for royalties and other payments from the franchisee, both the franchisor and franchisee would likely benefit simultaneously from the work performed, and both the franchisor and franchisee may potentially be jointly and severally liable for all wages owed to those employees. Horizontal joint employment, on the other hand, can occur where an employee is employed by two different employers during the course of a week.

Seventeen states including New York and the District of Columbia filed a lawsuit in the U.S. District Court for the Southern District of New York to challenge the DOL’s adoption of its new joint employment regulations. On September 8, 2020, U.S. District Court Judge Gregory Woods, in part, struck down the DOL’s new rule, vacating the DOL's joint employment regulations relating to vertical joint employer liability because he found they conflicted with the definitions contained in the FLSA and are arbitrary and capricious. A lot of employers, especially employee staffing agencies and franchisors, find themselves re-evaluating their relationships with clients and franchisees in light of this case.

The Court struck down all of the DOL’s new vertical joint employment regulations based principally on the Court's view that they conflicted with and unlawfully limited the FLSA's broad definitions of the terms “employer,” “employee,” and “employ.” In addition, the Court found that the DOL did not adequately justify its departure from its prior broad interpretations of the vertical joint employment concept and the regulations were therefore arbitrary and capricious.

The Court agreed that the four factors set forth in the DOL's new regulations “can be relevant to the joint employer inquiry," (emphasis in original) but took issue with the DOL's requirement that an entity must actually exercise one or more of the four control factors to be considered a joint employer. The Court also found that the DOL's rule unlawfully excluded the “economic dependence” factors from being considered in the joint employment inquiry.

Although the DOL has said it is disappointed in the decision, it has not yet filed an appeal, but an appeal is possible. In the meantime, franchisors, staffing agencies, temporary agencies, and similar entities, should operate under the old, broader, interpretation of vertical joint employment until a reversal of the New York opinion occurs or new regulations are issued by the DOL and to consult with counsel to further determine how this decision may affect their businesses. 

Practical Tips:
  • The National Labor Relations Board (“NLRB”) published its final rule to clarify the standard for determining “joint employer status” under the National Labor Relations Act (“NLRA”). The new NLRB Rule went into effect on April 27, 2020. You can find Ice Miller’s update regarding those regulations HERE. The NLRB Rule remains in effect and clarifies that a business or franchisor will be considered a “joint employer” of another entity’s employees only if the business exercises “substantial direct and immediate control” over one or more essential terms of employment of another employer’s workers. This new Rule is more flexible than the old NLRB rule, because basic franchise structures, such as setting quality and operational standards, should now not be enough to make a franchisor a joint employer. The district court's opinion out of New York has no effect on the NLRB Rule. But, just because you are not a joint employer for Union activity purposes does not eliminate the broader wage and hour issues that have resurfaced because of the New York federal district court decision.
  • Keep an eye on the Equal Employment Opportunity Commission (“EEOC”). The EEOC signaled back in November 2019 that it intends to issue its own joint employer rule. The New York decision puts in question what appears to be the current administration’s desire to put in place as clear of a rule as possible across the DOL, NLRB, and EEOC. Had this plan been effective, it would have simplified employer planning and analysis, at least under federal law. Don’t count on any real clarity until after the current election season.
  • The DOL recently received the go ahead from the White House regulatory office to release its Rule for determining whether a worker is an independent contractor under federal wage law, i.e., the Fair Labor Standards Act. The new proposed regulation was just released on Tuesday, September 22, 2020 and can be found HERE. The DOL comment period will be open for 30 days. Although this Rule is expected to be in favor of more individuals being characterized as independent contractors under federal law, there still remain many state laws, California in particular, that favor individuals being characterized as employees. Companies should remember that both state and federal law must be reviewed when making employee/joint employer/independent contractor analyses and decisions.
  • Despite Judge Woods attempt to down play the U.S. Supreme Court’s Encino Motorcars v. Navarro decision, which scaled back worker-friendly interpretations of the FLSA’s overtime pay rules, this ruling remains good law and should still be considered by employers for joint employer principles too (unless, of course, the U.S. Supreme Court, or your jurisdiction’s Circuit Court, agrees with Judges analysis is the future). Of course, although Encino Motors make one aspect of FLSA law more employer-friendly, that does not guarantee, or undue, decades of employee-friendly rulings. The FLSA remains a remedial statute intended to protect workers.
 Please contact Christina Fugate at (317) 236-2443 or or Paul Sweeney at (317) 236-5894 or, or another member of Ice Miller LLP's Franchise and Distribution Team or Labor, Employment and Immigration Practice Group if you have any questions regarding this article.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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