New York Court Vacates Portion of DOL’s Joint Employer Rule

By Parker E Thoeni - Shawe Rosenthal LLP

September 10, 2020

On September 8, 2020, U.S. District Court Judge Gregory Woods of the Southern District of New York, issued a Memorandum Opinion and Order vacating various portions of the Department of Labor’s (“DOL”) Final Rule regarding the definition of joint employment under the Fair Labor Standards Act (“FLSA”).  Judge Woods found that the Final Rule violated the Administrative Procedures Act (“APA”) because it was (1) arbitrary and capricious, and (2) not in accordance with law.

The DOL’s Final Rule

As we previously discussed in detail, the DOL’s Final Rule adopted two tests for determining joint employment.

The first, a four-factor balancing test, is applied to determine joint employment when an employee’s work for his or her employer simultaneously benefits the putative joint employer (referred to by the court as “vertical” joint employment).  The four factors require consideration of whether the putative joint employer (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 method of payment, and (4) maintains the employee’s employment records.  While no single factor is determinative under the Final Rule, satisfying the fourth factor alone is insufficient to establish joint employment.

The DOL’s Final Rule adopted a second test that applies when an employee works different hours for different employers within the same week (referred to by the court as “horizontal” joint employment).  Under that standard, the two employers are separate unless they are sufficiently associated, meaning (1) there is an agreement to share the employee’s services, (2) one employer is acting directly or indirectly in the interest of the other employer in relation to the employee, or (3) the employers share control of the employee, directly or indirectly, because one employer controls, is controlled by, or is under common control with the other employer.

As we noted previously, the Final Rule constitutes DOL’s interpretation of the FLSA, but not law, meaning courts are free to accept or reject the DOL interpretation.  Importantly, however, under the Portal-to-Portal Act, employers may not be held liable for overtime or minimum wage violations if they were acting consistently with guidance or interpretations by the DOL, even if such guidance or interpretation is later found to be invalid or of no legal effect.

The Court’s Opinion

Following a lengthy introduction and discussion regarding standing and ripeness, the court analyzed the four-factor test for vertical joint employment, first discussing its holding that the four-factor test violated the APA as contrary to law, then discussing its holding that the DOL’s interpretation of the FLSA violated the APA because it was arbitrary and capricious.  When a court determines that a final agency action is contrary to law or arbitrary and capricious, the APA requires the court to set aside, or vacate, the final agency action.  Thus, the court vacated the Final Rule based on the following analysis.

Contrary to Law

The court’s holding that the four-factor test was contrary to law revolved primarily around its objection to the DOL’s reliance solely upon the definition of “employer” to assess whether a joint employment relationship exists rather than also considering the intertwined definitions of “employee” and “employ” in the FLSA.  The court found that relying solely upon the definition of “employer” to determine whether joint employment relationship exists “does not make sense” because the FLSA definition of “employer” is based on the definition of “employ” and “employee.”  The court found that an interpretation that did not take into consideration all three definitions was contrary to the FLSA.

The court took issue with DOL’s distinction between (1) the test for whether an entity is an employer and (2) the test for whether an entity is a joint employer.  The court noted that the text of the FLSA does not separately define “joint employer,” but that “[j]oint employment arises because multiple entities may simultaneously satisfy the FLSA’s definition of ‘employer.’”  The court made clear that “[t]here is no independent test for joint employment under the FLSA.”  The court concluded that the test for primary and joint employment must be the same.

The court also rejected the DOL’s requirement that a second employer is the employee’s joint employer only if that person is acting directly or indirectly in the interest of the employer in relation to the employee.  In casting this interpretation as contrary to law, the court emphasized the language in the statute that the term “employer includes any person acting directly or indirectly in the interest of an employer in relation to the employee.”  Thus, the court deemed the statutory standard to be an example of a way in which an entity can be deemed an employer, rejecting the DOL’s interpretation that it is the only way an entity can be an employer.

The court further explained its view that the Final Rule demonstrated the DOL’s apparent ignorance of legislative history supporting the passage of the FLSA.  The court determined that the definition of the term “employ,” which includes to suffer or permit to work, was designed to expand coverage to businesses that used middlemen to employ children illegally and to clothing manufacturers that contracted with sweatshops to produce their merchandise.  The court found that the Final Rule “flouts this purpose.”

The court then discussed regulations and caselaw that are contrary to the interpretation embodied by the Final Rule.  The court stated that if the DOL interpretation was permissible, “some court would probably have adopted its rationale’” but it found no cases supporting the DOL’s interpretation, stating that “[o]ver eighty years later, this dog is yet to bark.”

The court also rejected the DOL’s interpretation that control is the “touchstone” of joint employment.  Finding that the four-factor test was a proxy for control, the court held that the FLSA rejected the common law definition of employ, which focuses on control, in favor of the much broader definition that employ means “suffer or permit to work.”  Because the Final Rule was based on the common law test, the court found it to be impermissibly narrow.

Finally, the court held that the Final Rule must be vacated because it unlawfully limits the factors the DOL will consider in the joint employment inquiry.  The court noted that factors other than those listed by the DOL have been held by the Supreme Court to be relevant to the analysis of joint employment.  The court asserted that the limitations in the Final Rule “do not make sense.”

Arbitrary and Capricious

In deeming the DOL’s action arbitrary and capricious, the court focused its attention on the DOL’s apparent lack of explanation for departing from prior interpretations, although it also recognized that DOL had explained its interest in creating a more uniform system for determining joint employment.  The court also discussed its view that the Final Rule conflicted with regulations regarding migrant workers under the Migrant and Seasonal Agricultural Workers Protection Act, which incorporates the FLSA definition of “employ.”  Finally, the court held that the DOL did not sufficiently consider the potential cost to workers, despite the fact that the DOL acknowledged that the Final Rule could result in fewer findings of joint employment.

Four-Factor Test Vacated

Because it found the Final Rule contrary to law and arbitrary and capricious, the Court vacated the four-factor test for “vertical” joint employment, leaving in place the three-factor test for “horizontal” joint employment.  The court did not issue an injunction limited to any particular jurisdiction, nor did it cast its holding as limited to application in the states that sued the DOL (New York, Pennsylvania, California, Colorado, Delaware, D.C., Illinois, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, Oregon, Rhode Island, Washington, Vermont, and Virginia).  Vacatur under the APA is not limited to any particular jurisdiction, meaning employers nationwide should be cautious about reliance upon the four-factor test.  Employers in the states that sued the DOL, in particular, should discontinue reliance on the four-factor test because the court’s order applies to those states as parties to the dispute with the DOL.

Up to this point, employers have been free to rely upon the DOL’s Final Rule in assessing joint employer liability, but now that the four-factor test has been vacated, employers should revisit the standards set by the courts in their jurisdictions.  Specifically, employers in the Fourth Circuit should rely upon the expansive joint employment status test established in Salinas v. Commercial Interiors, Inc.  With the Final Rule vacated based on such an expansive view of what constitutes joint employment, employers would be well-advised to keep abreast of developments from the DOL regarding its next steps, which could involve an appeal or a potential revision to the Final Rule.  Finally, employers should remain mindful of the fact that different joint employment tests apply under different laws, including, for example, the NLRB’s recent Final Rule addressing joint employment.