Federal Judge Strikes Down Critical Part Of Final Joint Employer Rule

Last week, Federal Judge Gregory Woods of the U.S. District Court for the Southern District of New York held that the Department of Labor (DOL) overstepped its regulatory authority in issuing the new standard for joint employer determination.

The Judge’s ruling was in response to 17 states and the District of Columbia who filed a lawsuit to overturn the joint employer final rule issued by the DOL effective March 16, 2020 stating that the final rule is “arbitrary and capricious.”

Judge Woods found that the four-part test to determine if one company is a joint employer of another company is too narrow.

The test considers all factors together, whether the potential joint employer hires employees; supervises or controls work schedules; sets pay rates; and maintains employment records.

However, the test requires an employer to actually exercise one of the four factors in order to qualify as a joint employer, instead of simply reserving the right to do so, which makes the standard inconsistent with the FLSA, Judge Woods ruled.

DOL’s final rule established a “high bar” for joint-employment under the FLSA. Employer groups are pushing back and urging the DOL and the Department of Justice to appeal the decision.

PMAA continues to support it to the DOL final rule and for a brief refresher, please see below.

— The DOL joint employer final rule went into effect on March 16, 2020 which revised and updated regulations interpreting joint employer status under the FLSA.

The final rule provides updated guidance for determining joint employer status when an employee performs work for his or her employer that simultaneously benefits another individual or entity, including guidance on factors that are not relevant when determining joint employer status.

Specifies that when an employee performs work for the employer that simultaneously benefits another person, that person will be considered a joint employer when that person is acting directly or indirectly in the interest of the employer in relation to the employee;

— Provides a four-factor test to determine when a person is acting directly or indirectly in the interest of an employer in relation to the employee, by weighing whether the business, with regard to its franchisee or contractor, maintains the power to hire and fire; to supervise schedules and “conditions of employment;” to set pay; and to keep employment records;

— Clarifies that an employee’s “economic dependence” on a potential joint employer does not determine whether it is a joint employer under the FLSA; and specifies that an employer’s franchisor, brand and supply, or similar business model and certain contractual agreements or business practices do not make joint employer status under the FLSA more or less likely.

As a result of the Court’s decision, there is substantial uncertainty as to how the Joint Employer Rule will be applied in the short and long term.

By setting aside the rule, it would appear that the pre-March 2020 Obama-era rule would be reinstated, at least during the pendency of the expected appeal of Judge Woods’ ruling.

Unlike the final rule discussed above, the Obama-era Joint Employer Rule looked at whether an entity had the “reserved” authority to control pay rates, work schedules, and hiring and firing of employees, irrespective of whether the authority was ever exercised.

 It is extremely unlikely at the present time that legislation or further administrative action will resolve the matter short of further litigation in the courts.

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