On September 8, 2020, the United States District Court for the Southern District of New York struck down portions of a January 2020 Final Rule issued by the Department of Labor. The Final Rule provided a new test for determining whether an entity is a joint employer with another entity under the Fair Labor Standards Act (FLSA). The Final Rule, which became effective in March of 2020, severely limited the situations in which an entity can be considered a joint employer and held liable for violations of the FLSA in a “vertical” joint employment relationship. A vertical joint employment relationship is the variety of joint employment that exists when there is some sort of intermediary, like a staffing firm, PLA, or temp agency between the employee and the employer that ultimately benefits from the employee’s work. We discussed “horizontal” joint employment in a prior post.

Several states, including Illinois, filed suit challenging the Final Rule’s legality with respect to the Final Rule’s changes to the vertical joint employment determination. Historically, courts and the DOL have made clear that control over an individual’s employment is not the dispositive factor in determining whether an entity is a joint employer with another entity. Instead, whether a joint employment relationship exists depends upon whether the employee in question is economically dependent upon the potential joint employer.

The Final Rule’s revised test for determining whether a vertical joint employment relationship exists deviates from a focus on economic dependence and focuses solely on establishing the level of control the potential joint employer has over the employee in question.  The Final Rule implemented a four-factor balancing test to determine whether a vertical joint employment relationship exists. The factors are, whether the potential joint employer actually: (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; and (4) maintains the employee’s employment records. The weight assigned to each factor is determined on a case-by-case basis.

The DOL acknowledged that the new standard for “determining joint-employer status under the FLSA . . . may reduce the number of businesses currently found to be joint employers from which employees may be able to collect back wages due to them” and that “[t]his, in turn, may reduce the amount of back wages that employers are able to collect when their employer does not comply with the [FLSA] and, for example, their employer is or becomes insolvent.” The DOL explained that despite the impact on employees, the revisions to the joint employment relationship determination are necessary to bring clarity and uniformity to the joint-employer determination.

In its ruling, the District Court held that portions of the Final Rule related to the vertical joint employment determination are illegal because they violate the Administrative Procedure Act, conflict with the FLSA, fail to explain the DOL’s departure from its previous interpretations of the FLSA, and are arbitrary and capricious. Significantly, the Court held that the Final Rule’s departure, without explanation, from the DOL and courts’ long history of rejecting a control-based test for determining the joint employer relationship, along with the DOL’s failure to explain why the benefits of the new rule outweighed the costs, caused the Final Rule to be “legally infirm.”

For now, the DOL’s revised test for joint employment has been vacated and is no longer in effect. This means that the economic realities test for joint employment, which asks whether an employee is economically dependent upon the potential joint employer, is reinstated. The DOL may, however, appeal the Court’s decision. We will continue to update you as developments arise.