On August 8, 2020, a New York federal district judge struck down a significant portion of the DOL’s “joint employer” rule, meaning certain employers may be more likely to be deemed “joint employers” and exposed to liability for employee wage and hour violations under the FLSA. The “joint employer” final rule, which was issued by the DOL in January 2020, imposed a four-factor test for deciding whether employers in “vertical” employment relationships (i.e., when workers for a staffing company or other intermediary are contracted to another entity) are joint employers under the FLSA.

The final rule replaced the previously applicable “not completely disassociated” standard for determining joint employer status, providing that the “other” entity was a joint employer only if that entity was acting directly or indirectly in the interest of the employer in relation to the employee. The four-factor test focused on the employer’s control over the employee, including whether the putative joint employer:

  • Hired or fired the employee;
  • Supervised and controlled the employee’s work schedule or conditions of employment to a   substantial degree;
  • Determined the employee’s rate and method of payment; and
  • Maintained the employee’s employment records.

After a challenge to the rule by a New York-led coalition of 17 states arguing that the final rule exposes employees to wage theft, Judge Gregory Woods of the US District Court for the Southern District of New York struck the four-factor test and other portions of the final rule relating to “vertical” employment relationships, ruling they conflict with the FLSA and prior DOL precedent.

The court held the final rule unlawfully “conflicts with the FLSA because it ignores the statute’s broad definitions.” Specifically, the court found that the final rule’s requirement of one of the four “control factors” as a necessary condition for joint employment status conflicts with the FLSA’s broad definition of “employ”-to “suffer or permit work.” The court elaborated that “substantial control” may be sufficient to support joint employer liability, but is not necessary under the FLSA. The court also found the DOL “failed to adequately justify its departure from its prior interpretations and to account for some of the final rule’s important costs,” noting that the DOL did not adequately explain why it disregarded evidence showing that the final rule’s narrowing of the joint employment test would expose workers to wage theft.

Employers should note the difference between the portion of the rule applying to “vertical” employment relationships, which was struck down, and the portion applying to “horizontal” employment relationships, which remains standing.

  • “Vertical” employment relationships are ones in which an employee works one set of hours for an employer that simultaneously benefits another individual or entity-such as when workers for a staffing agency, subcontractor, labor provider or other intermediary are contracted to another entity.
  • “Horizontal” employment relationships are ones in which a worker performs distinctly different jobs for multiple employers and the employers are “sufficiently associated” with respect to the employment of the employee. “Sufficient association” occurs when there is an arrangement between the employers to share the employee’s services, when one employer is acting directly or indirectly in the interest of the other employer in relation to the employee, or when the employers share control of the employee by reason of the fact that one employer controls, is controlled by, or is under common control with the other employer.

A “horizontal” employment relationship can be illustrated by an employee who works at two locations of the same boutique retail store. The two locations are operated by separate legal entities, but the same individual is the majority owner of both. The managers at each site share the employee between the two locations, work together to jointly coordinate the employee’s schedule, share supervisory authority, and pay the employee through the same payroll processor.

Employers in “vertical” employment relationships who were relying on the DOL’s final rule for purposes of determining whether they are joint employers under the FLSA should consult with counsel to determine next steps, including the possibility of conducting a joint employer audit to evaluate potential risk arising from relationships with third-party suppliers of workers.

Employers should also stay abreast of any additional developments, including whether the DOL appeals. For assistance with the possible impact of this ruling on your business, contact your Baker McKenzie employment attorney.