New developments related to joint employer liability have arisen since our blog article posted on April 4, 2019. In that post, we discussed the proposed rule to narrow the definition of a “joint employer” under the Fair Labor Standards Act (FLSA). Following a review and comment period, in Jan. 2020, the U.S. Department of Labor (DOL) announced a Final Rule, adopting the rule as proposed which then became effective in March 2020.
The DOL rule established a four-factor test for deciding whether workers can hold two or more linked businesses liable for the same Fair Labor Standards Act (FLSA) violation. The rule emphasized control over workers, asserting joint employment hinges on common powers to hire and fire, supervise and schedule, determine compensation, and maintain employment records. Because joint employers are jointly and severally liable for FLSA claims, the rule provided franchisers and businesses that hire workers through staffing firms a shield from liability for many minimum wage and overtime pay claims based on alleged joint employment with those staffing firms.
On Sept. 8, 2020, the U.S. District Court in the Southern District of New York granted summary judgement to a coalition of states that challenged this joint employer rule. The court ruled that the DOL rule violated the Administrative Procedure Act because it conflicted with the FLSA and was arbitrary and capricious. One such conflict the court identified was what it means to “employ” a worker. The DOL predicated its rule on the definition of “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee” whereas the FLSA says that to employ a worker is to “suffer or permit” them to work.
According to the court, “An employer is a joint employer if it suffers or permits an employee to work while another employer simultaneously suffers or permits the same employee to work…[b]ut the Final Rule says [the definition of ’employ’] is irrelevant to the joint employer analysis. The Court held that contradicts the plain text of the FLSA.”
The ruling further distinguished between vertical and horizontal joint employment scenarios by striking down the DOL’s new four-factor test related to vertical employment, as mentioned above. A vertical relationship between joint employers is the typical staffing company/client arrangement, where the joint employers are unrelated entities and one serves to supply workers needed to the other. Previously, the DOL relied on an economic reality analysis, that takes into account various non-exclusive and non-dispositive circumstances surrounding the relationship between the worker and the putative joint employer. The four-factor balancing test was a departure from the previous analysis; a departure that the court ruled could not stand.
In contrast, a horizontal joint employment relationship is where a worker is jointly employed by two related companies, such as a parent and subsidiary or related businesses with common ownership. The DOL’s standard for horizontal employment was preserved, as the revisions contained in the Final Rule did not significantly depart from the current analysis. That standard analyzes the degree of association and sharing of control by potential horizontal joint employers including considerations such as: Does one employer own part or all of the other or do they have any common owners? Do the employers have any overlapping officers, directors, executives or managers? Do the employers share control over operations, such as hiring, firing, payroll, advertising and overhead? Is supervisory authority for an employee shared? Do the employers treat employees as a pool available to both of them?
Employers who frequently utilize subcontractors or staffing agencies should work closely with counsel to monitor the potential effects of this decision on their operations and the risks they are comfortable taking in their staffing arrangements with other companies.