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Vertical Joint Employment - DOL’s Attempt to Limit and Clarify “Joint Employer” Rule Struct Down

gavelLast week a New York district court judge found the U.S. Department of Labor (DOL) rules limiting when businesses that use other businesses’ workers (vertical) may also be sued by the workers if a wage and hour (FLSA) violation is alleged.

The issue of joint employment impacts not only contractor-vendor business relationships but many other multi business organization relationships such as franchise corporate set ups and situations where two businesses operate separately but having common ownership engage the same workers at both organizations.

Last January, the DOL issued new rules outlining a four-factor test that will be used to decide if a single employer exercised enough control in “linked” businesses to be liable for the same FLSA violation. Note that the issue in this case was fairly narrow – that of a wage and hour complaint. The total issue of who may be found to be a joint employer expands to labor relations (the National Labor Relations Act), tax (Internal Revenue Service), and many more laws where two entities have a business relationship where workers are performing services for another business or are under a level of control or direction of another business though employed by one.

The four-factor test for determining joint employment was if the employer controlled whether employees were “(i) hired or fired; (ii) supervised and controlled the employee’s work schedule or conditions of employment to a substantial degree; (iii) determined the employee’s rate and method of payment; and (iv) maintained the employee’s employment records.” 

The New York federal court found the January DOL rules were issued without proper compliance with the Administrative Procedures Act and “it conflicts with the FLSA because it ignores the statute’s broad definitions” (NYDC Judge Gregory Woods) of who is considered an employer.

To further confuse a confusing decision that addresses a complex array of business circumstances, the court’s decision applied only to what are called “vertical” employment relationships. Vertical joint employment relationships are found where one business contracts with another business for workers (think staffing company). Joint employment is often alleged when the contracting company (the customer) receives the work, but the contractor to the customer does not comply with wage and hour law.  Specifically, the company obtaining outside help is found joint when it has applied a high degree of direct and on-going control over the vendor’s workers.

The vertical joint employment situation is different than the horizontal joint employment relationship. The horizontal employment relationship is found where two sufficiently associated businesses exercise control to the extent the workers at both operations are found to be jointly employed by the parent owner – think worker working at two separate stores owned by one parent company.

Historically, different government agencies and federal and state governments have had different tests to determine joint employment when a particular legal issue arises. Several years ago the previous federal administration sought to strip away the “curtain” between contractor and vendor, franchisor and franchisee, and other multi party business relationships to a point where almost no independent contractor status remained. Everybody could be considered an employee regardless of how little control the contracting entity exercised over the sub-contracted entity operation. This move was believed to provide protections against alleged employer abuses (lower pay). But equally likely to also ensure collection of more tax revenue by curtailing the use of small independent contractors that often skirted payment of payroll taxes received “under the table.”

The new rules issued last January sought to loosen the more encompassing definition of joint employment previously in place and formalize the definition/tests/criteria that had previously been interpreted by agency guidance and that varied from the administration in place at the time. The new DOL rule sought to formalize the joint employment definitions using more traditional criteria that favored multi-employer businesses more than the interpretive guidances that sought a restrictive definition of joint employment.

However, the NYDC found as to vertical joint employment that the new rule did not comply with the broad definition of “employ” that is stated in the FLSA and specifically that law’s “suffered or permitted” to work term. The NYDC Court found that “an 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”, because the new DOL “[Rule] says the definition of employ is irrelevant to the joint employment analysis as it contradicts  the plain language of the FLSA.”

The question of how much of a set-back this is toward helping employers avoid potential employment liability (because of the business relationship and another legal organization working together) is open again. This decision will be appealed to the Second Circuit Court of Appeals which will hopefully reverse the aberrant lower court. However, if the Appeals Court upholds the decision, the DOL (under perhaps a new Washington administration) may have to decide how or whether to fix the joint employment rules again. Otherwise future joint employment interpretation will vary and ebb and flow with the courts and with the federal agencies at a given time.


Source: Law 360. Labor Department ‘Joint Employer’ Rule Struck Down 9/8/202


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