Federal Court Strikes Down Parts of ‘Joint Employer’ Rule

Employer liability for wage violations receives a major blow.

September 10, 2020

ALEXANDRIA, Va.—On Tuesday, a New York federal court struck down portions of the Labor Department’s new joint employer rule that went into effect a few months ago.

U.S. District Judge Gregory Woods decided that the rule did not comport with the Fair Labor Standards Act (FLSA) and tossed out the new standard that had applied to “vertical” employment relationships (for example, when staffing company or subcontractor workers are contracted to work with another entity, or potentially, franchise or branded business relationships). The ruling did not change the standard that applies to “horizontal” relationships in which a worker is employed by two “sufficiently associated” businesses. These situations may include relationships between retailers and their suppliers or when retailers hire outside businesses for specific tasks like maintenance, garbage removal or other work.

In January 2020, the Department of Labor’s (DOL’s) new joint employer rule created a four-part test to determine whether a business is equally liable for obligations under the FLSA. It assesses whether the entity in question:

  1. Hires or fires the employee.
  2. Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree.
  3. Determines the employee’s rate and method of payment.
  4. Maintains the employee’s employment records.

A group of 17 states and the District of Columbia challenged the rule in a New York federal court, and the case concluded with a 62-page ruling by Judge Woods Tuesday. The decision provides an in-depth and complex analysis.

Here are some of the highlights from the decision:

The judge ruled that the rule conflicts with the FLSA because it “ignores the statute’s broad definitions.” He concluded that the FLSA created an expansive system for examining employees with relation to employers, and that the DOL inappropriately narrowed it when it limited the definition of “joint employer” to solely encompass the four-part test. Specifically, the judge held that the rule’s requirement that an entity actually exercise control over a worker to be deemed a joint employer conflicts with the FLSA, and that control is merely one factor courts and the DOL have and should continue to review.

“For the convenience-retailing industry specifically, the impact of yesterday’s decision is most likely to be felt by those that are franchisors and/or have branding agreements with major oil companies,” said Jon Taets, director of government relations, NACS. “The franchise model is the primary one of concern as that vertical operating status was the primary subject of the previous tighter Obama Administration rule. Those with branding agreements may be vulnerable depending on how that arrangement is interpreted.” 

Companies such as McDonald’s, Amazon and FedEx, which depend on franchisees and outsourcing, have wanted to narrow the joint employer standard. Led by New York and Pennsylvania, the states that brought the suit said the administration’s rule would make it difficult to hold companies liable for minimum wage and overtime law violations committed by franchisees and contractors. The judge’s ruling is subject to appeal.