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Federal District Judge Refuses to Follow New DOL Joint Employer Test; Follows Prior Guidance Instead

September 14, 2020

A federal judge recently struck down the central elements of the Department of Labor’s (“DOL”) new joint employer test.  This new test, promulgated in March 2020 (the “Final Rule”), narrowed the scenarios under which multiple businesses could be defined as joint employers under the Fair Labor Standards Act (“FLSA”) with regard to minimum wage and overtime violations.

The New York district court’s ruling concerned vertically integrated enterprises.  The FLSA generally views joint employer relationships under two types of “integration” structures: vertical integration and horizontal integration. Under vertical integration, one employer technically employs an employee, but the employee actually works for and is economically dependent on a second entity.  Conversely, under horizontal integration, the two entities both separately employ the worker, but the entities are so closely associated with each other that the law views them as a single employer.  If joint employment exists under either theory, the individual asserting an FLSA claim can recover damages against both “joint employer” entities.  The recent court ruling analyzed the Final Rule with respect to vertical joint employment only; the horizontal joint employment rules are not affected by this ruling.

Under the Final Rule, if an entity that is not the primary employer of an individual benefits from an employee’s work, that entity is a joint employer only if it is acting directly or indirectly in the interest of the employer in relation to the employee.  The Final Rule laid out a four-factor balancing test that considers whether the potential joint employer: (a) hires or fires the employee; (b) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; (c) determines the employee’s rate and method of payment; and (d) maintains the employee’s employment records.

The court held that the Final Rule conflicts with the FLSA.  Specifically, the court found that the DOL improperly relied on the FLSA’s definition of “employer” as the basis for vertical integration, without appropriately harmonizing it with principles of joint employment.  According to the court, the joint employment test could not be separated from the definition of “employee,” as this was too narrow of an analysis.  The court further held that the application of two separate tests for “employer” and “joint employer” creates a problem with regard to employee movements between separate entities that may or may not be vertically integrated.  The court reasoned that, under the Final Rule, it would be too difficult to determine which entity is the employee’s actual employer and which is the joint employer.  Finally, the court ruled that, under the FLSA, a joint employer need not actually exercise control over the employee at issue; rather, merely reserving the right to do so is sufficient.  Such a ruling could greatly expand the concept of joint employment.

The New York district court’s ruling revives the uncertainty regarding joint-employment relationships that existed before the DOL issued the Final Rule.  However, this fight is not over.  The court’s ruling is not binding on other courts, although it may be considered persuasive.  Additionally, the decision will likely be appealed.  Nevertheless, it highlights the continuing legal battle over joint-employment relationships.

Employers should carefully evaluate their policies and employment relationships to ensure they are protected from potential joint employment liability.  For guidance on this or any other workplace issue, please do not hesitate to contact your relationship attorney or one of Honigman’s Labor and Employment attorneys.