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Federal Decision Causing Headaches for Joint Employers in NYC

Author: Dominic Donato

Guest Editor: Jeremy Freedman

October 5, 2020 1:07pm

In a landmark decision with ramifications for businesses across the country, a recent decision by the United States District Court for the Southern District of New York partially struck down the Department of Labor’s (“DOL”) new joint employer rule, which became effective on March 1, 2020.

Prior to the issuance of the new rule, the longstanding joint employer doctrine defined joint employment relationships. This doctrine found its genesis in a 1939 DOL interpretative bulletin, which established the legality of the joint employment relationship. Codification of the doctrine and the creation of a joint employment standard occurred through passage of the FLSA and subsequent regulations promulgated by the DOL. Pursuant to this standard, a joint employment relationship exists where employment by one employer “is not completely disassociated from employment by the other employer.” Where such a relationship exists, employers may be jointly and severally liable for violation of federal labor laws and rules.

In an effort to make the joint employer test more employer-friendly from a liability perspective, the DOL under the Trump Administration proposed the first update to the joint employment standard in nearly 60 years. The new rule established a four-factor balancing test to determine joint employer status, focusing on whether the employer may:

  1. hire or fire the employee;
  2. supervise and control the employee’s work schedules or condition of employment;
  3. determine the employee’s rate and method of payment; and
  4. maintain the employee’s employment records.

Following the issuance of the rule earlier this year, a coalition of 17 states and the District of Columbia contended that the new four-factor test ran afoul of the Administrative Procedures Act (“APA”)  governing the rulemaking procedures of the DOL and other federal administrative agencies.

In ruling on the coalition’s motion for summary judgment, SDNY Justice Gregory Woods held that the new test did, in fact, violate the APA and the FLSA by unlawfully narrowing the broad definition of “joint employer” with respect to vertical joint employment relationships, i.e. subcontract employees or employees of staffing agencies contracted for employment. The four-factor test, however, remains in effect for horizontal joint employment relationships.

Takeaway

While this may be bad news for employers hoping to substantially reduce potential liability exposure in vertical joint employment relationships, the SDNY’s decision may only be a temporary setback, as this case will likely be appealed to the United States Court of Appeals for the Second Circuit. Tyson & Mendes will be carefully following this case and providing important updates as it progresses.

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