On September 8, 2020, a federal judge in New York struck down an important part of the US Department of Labor's new common employer rule ("DOL") that came into effect in March 2020 just a few months ago.
Under the Federal Law on Fair Labor Standards (“FLSA”), an employer is any person or organization that “suffers or allows” a person, a definition that is generally considered to be extremely broad. In addition, more than one employer may "suffer or allow" the same person to work and therefore be held jointly and severally liable for wage and hourly violations based on the extent and type of control each employer has over the worker's work Has. This is viewed as a "joint employer relationship". For example, if two companies share a work area and the second company has the authority to supervise or discipline an employee of the first company, the second company can be considered a common employer.
The DOL first established common employer rules in 1958. At the time, the concept of who could be held liable as a joint employer was broad and included companies that were not “completely segregated” with respect to an employee. More recently, DOL has emphasized that the "economic realities" of relationships between different companies and employees are of great importance in determining common employer status.
In January 2020, the DOL published a new regulation for joint employers that established a four-factor balancing test to determine the status of a joint employer. The four-factor test focuses primarily on the types of direct control employers have over employees.
The four-factor test particularly checks whether the potential common employer:
- hires or fires the employee;
- monitors and controls to a significant extent the work schedule or conditions of employment of the employee;
- determines the tariff and payment method of the employee; and
- maintains the employee's employment documents.
No factor is decisive for a joint employer relationship. However, for joint employer status it is not sufficient to just keep employment documents. The new rule was generally welcomed as employer-friendly as it required a stricter joint employer test that made it more difficult to establish joint employer liability. The new regulation came into force in March 2020.
The decision of September 8, 2020:
On Tuesday, September 8, 2020, Judge Gregory Woods, a U.S. District Court judge for the southern borough of New York, ruled a summary judgment in favor of a coalition of 17 states and the Columbia borough ruling a case against the new rule brought forward as an unlawful limitation of the previous broad definition of the term "common employer" (the "Decision"). In the 62-page ruling, Judge Woods found that the new rule violated the Administrative Procedure Act, which governs the decision-making powers of administrative agencies such as the DOL, and is incompatible with the FLSA.
Most importantly, the decision removes the new rule for “vertical” employment relationships (e.g. employees of a subcontractor or a recruiting agency working for another company). This means that vertical employment relationships in the new rule would not be subject to the strict four-factor test for joint employers, but rather the old, milder rule for joint employers. This is in contrast to “horizontal” employment relationships in which affiliated companies exercise or share control over a single employee. In the decision it was expressly stated that the "non-essential changes to the horizontal joint employer liability … of the new regulation … remain in force". Vertical jobs are much more common than horizontal jobs. The ban on applying the new rule to vertical employment relationships therefore means that such relationships are now more subject to joint liability of the employer.
In a broader sense, the decision stated that the new rule “contradicts the FLSA because it ignores the general definitions of the law. And the (DOL) has failed to adequately justify its departure from its earlier interpretations and to take into account some of the important costs of the final rule, “which makes it arbitrary and capricious. The decision states that the new rule inappropriately restricts the FLSA's broad definition of “employer” by restricting the definition of “joint employer” and requiring that a joint employer exercise certain controls over an employee. In addition, Judge Woods stated that DOL ignored important legislative history and explained the rationale behind the broad definition of employment as "suffering and allowing someone to work". Judge Wood discussed the derivation of the sentence from child labor laws that were enacted to prevent a company from evading liability by using a middleman to hire child labor. He stated that the new rule would disregard this crucial legislative history by potentially avoiding a similar "middle man" (i.e., vertical employment relationship) establishment under common employer status. In addition, Judge Woods noted that DOL did not have sufficient reason to change the previous joint employer rules so drastically and failed to answer key questions that arose during the notice and comment period.
While this decision significantly changes the new regime and could significantly increase the joint employer's liability, it is likely to be appealed. Therefore, employers should assess whether changes they made in response to the new rule are affected by the decision and prepare to change their practices accordingly if the decision persists.
We will carefully monitor the status of any objections or clarifications to the decision and provide updates as soon as new information becomes available.