Portions of Department of Labor’s Joint Employer Rule Deemed Unlawful

On March 16, 2020, the Department of Labor (“DOL”) issued a final rule narrowing the definition of joint employer under the Fair Labor Standards Act (“FLSA). In the rule, the DOL listed four factors to be examined when determining whether an entity could be considered a joint employer. Specifically, the rule focuses on whether the potential joint employer has the ability to: (1) hire or fire the employee; (2) supervise and control the employee’s work schedule or conditions of employment to a substantial degree; (3) determine the employee’s rate and method of payment; and (4) maintain the employee’s employment records. In short, the amount of control actually exerted over the employee by the potential joint employer is the primary issue under the final rule.

After the rule became effective, 17 states and the District of Columbia filed a lawsuit in the U.S. District Court, Southern District of New York, seeking to block implementation of the rule. On September 8, 2020, U.S. District Court Judge Gregory H. Woods issued an order declaring significant aspects of the joint employer rule unlawful, blocking implementation of these portions of the rule.

In its very-detailed, 62-page order, the court focused on the original intent of the FLSA to bring as many employees as possible within the protections of the statute. To accomplish this intent, Congress included very broad definitions of “employ,” “employee” and “employer” in the FLSA. According to the court’s order, in determining whether an employment relationship exists, courts and the DOL traditionally have examined the “economic reality” of the facts and circumstances surrounding the relationship.  The “economic reality” test largely rejected any suggestion that “control” over the employee’s terms and conditions was the most significant factor. By emphasizing the amount of control over the employee, the court held the DOL’s control-based test for joint employer liability conflicts with the FLSA.

The court reasoned that the DOL’s joint employment rule relied only on the definition of “employer” set forth in the statute, ignoring the broad definition of “employee” and “employ.” Since the definition of “employer” includes the word “employee,” the court determined that the DOL’s exclusion of the definition of “employee” from its rule-making process was in error. In addition, the court held the DOL’s interpretation ignored the fact that an employee has joint employers if the employee has multiple employers for the same set of hours worked. According to the court, because the FLSA does not contain an independent test for joint employment, two or more separate entities can both meet the definition of employer under the FLSA. The court summarized that: “[a]n 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.”

The court also struck down the rule because it deemed certain factors irrelevant, such as whether the employee is economically dependent on the potential joint employer. In doing so, the court held the rule contradicted case law and prior DOL declarations on this issue.

As an example of how joint employment should work, the court looked to the temporary staffing relationship with a corporation. The staffing agency begins as the employee’s employer. A corporation retains the agency to provide temporary employees and the agency hires out the employee to the corporation. At this point, both the agency and the corporation are the employee’s employer, becoming joint employers. If the corporation hires the employee as one of its own full-time employees, then the agency no longer is the employee’s employer, and the two entities cease being joint employers.

The order issued by Judge Woods, appointed by former President Obama, clearly will have a significant legal impact on how employers analyze their potential liability for wage and hour violations in a joint employer situation. Should the court’s order be upheld on appeal, the DOL most likely will revisit its rule in yet another attempt to address what the current administration has deemed a high priority item. With the November elections looming, employers should continue to monitor this issue and refer any questions concerning potential liability to experienced employment counsel.

The St. Louis employment attorneys at McMahon Berger have been representing employers across the country in labor and employment matters for over sixty years and are available to discuss these issues and others. As always, the foregoing is for informational purposes only and does not constitute legal advice regarding any particular situation as every situation must be evaluated on its own facts. The choice of a lawyer is an important decision and should not be based solely on advertisements.

Learn more aboutStephen B. Maule
Stephen’s practice includes all aspects of labor and employment law. He assists employers with immigration petitions to the U.S. Citizenship and Immigration Service, including H-1B, TN and permanent residency. He has also represented employers in investigations conducted by the U.S. Immigration and Customs Enforcement.