A federal judge in New York has ruled against major parts of the U.S. Department of Labor’s (DOL) employer-friendly rule on joint employment.
In his September 8 ruling, Judge Gregory Woods of the U.S. District Court for the Southern District of New York called the DOL’s rule “arbitrary and capricious.” The lawsuit, New York et al. v. Scalia et al., was filed by the attorneys general of 17 states and Washington, D.C.
The DOL released its final rule on joint employment and how it relates to the Fair Labor Standards Act (FLSA) in January. The rule took effect in March. Many employers cheered the change—particularly those that use staffing agencies, have franchise relationships, or rely on subcontractors—since it makes findings of joint employment less likely than under previous guidance.
During the Obama administration, the DOL considered “economic realities” in deciding whether a joint employment relationship exists. Instead of an economic realities test, the Trump administration’s rule used a four-part test. It looks at whether a potential joint employer:
- Hires or fires the employee;
- Supervises and controls the individual’s work schedule or conditions of employment to a substantial degree;
- Determines the worker’s rate and method of payment; and
- Maintains the employment records.
Charles H. Kaplan, an attorney with Hodgson Russ LLP in New York City, says the judge ruled the Trump administration’s rule was too narrow “because, for example, it required that a company actually exercise control in the workplace, rather than simply have the right to exercise control.”
Also, the judge noted “federal courts had found support for joint employer relationships under the FLSA based on factors that the Trump administration’s rule failed to include,” Kaplan says.
“This decision is a blow to franchisors, such as McDonald’s, and to companies, such as Amazon.com, that outsource functions such as home delivery,” Kaplan says. “The new rule would make it more difficult to find that such employers are joint employers.”
Vertical Versus Horizontal Employment
Paul J. Sweeney, an attorney with Coughlin & Gerhart, LLP in Binghamton, New York, says the court’s ruling strikes down the part of the DOL’s rule dealing with “vertical employment,” which normally occurs when a contractor, such as a temporary staffing agency, places workers at a single employer.
The judge’s ruling left intact the DOL’s rule on “horizontal employment,” which occurs when a worker is employed by several employers. Vertical employment is far more common than horizontal employment, he says.
Sweeney says the judge found the rule arbitrary and capricious because it ignored the policy behind the FLSA, the Act’s implementing regulations, and prior legal precedent that recognized indirect control over workers by a potential joint employer and their economic dependence on that employer.
Ruling ‘Eviscerates’ Reason for Rule
Richard J. Morgan, an attorney with Burr Forman McNair in Columbia, South Carolina, says the judge’s ruling “effectively eviscerates the reason” for the DOL’s rule and “appears to adopt the Obama-era ‘economic realities’ analysis as the standard.”
“The ruling’s core is that for those businesses in a franchise or contractor-type situation in the states who sued, the Obama-era joint employer rule is likely the standard,” Morgan says.
The lawsuit was filed by the District of Columbia and 17 states: New York, Pennsylvania, California, Colorado, Delaware, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, Oregon, Rhode Island, Washington, Vermont, and Virginia.
The DOL has said it will review its legal options in light of the court’s ruling.
Tammy Binford writes and edits news alerts and newsletter articles on labor and employment law topics for BLR web and print publications.