Court vacates Labor Department’s joint employment rule, says department ‘needs to do better’

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A District Court has ruled in favor of Pennsylvania and 17 other states that sued the Department of Labor over its guidelines for determining whether employers can be held as jointly liable for wages, overtime and violations under the federal employment protection statutes.

U.S. District Judge Gregory H. Woods of the Southern District of New York said on Tuesday the Department of Labor’s final rule that narrowed the standards for determining joint employment under the Fair Labor Standards Act (FLSA) violated the Administrative Procedure Act, which holds agencies accountable for issuing rules that are considered “arbitrary and capricious,” and conflicted with the FLSA’s broad definitions of employment.

The joint employment standard, which provides protections for employees with multiple employers, was revised in January by the department to include a four-factor test for determining FLSA joint-employer status. Under the department’s final rule, an employer could only be held liable by its subcontractor’s employees under the FLSA if the employer:

• Hires or fires the employee;
• Supervises and controls the employee’s work schedule or conditions of employment to a substantial degree;
• Determines the employee’s rate and method of payment; and
• Maintains the employee’s employment records.

The final rule was designed to provide clarity to employers and “break down barriers” that keep companies from constructively overseeing and assisting business partners, the department said in January upon announcing the new interpretation.

The rule replaced an Obama-era guidance that assessed joint employment status based on whether the employer had the right to control the employee’s work conditions, rescinded by the Trump administration in 2017. Local attorneys said in interviews this week the Obama-era standard left the door open for employers to be held legally responsible for the misconduct of a subcontracted firm.

“By giving greater clarity to businesses who want to work together, we promote an entrepreneurial culture that has driven American prosperity for decades,” Secretary of Labor Eugene Scalia said.

But Woods called the final rule “arbitrary and capricious” for failing to justify the narrowing of the rule’s interpretation and disregarding the costs it would impose to employees and state agencies. While the department’s justifications for the rule are valid, Woods said, it must provide adequate reasoning for such a significant departure from prior interpretation and make more than a “perfunctory attempt to consider important costs, including costs to workers, and explain why the benefits of the new rule outweigh those costs.”

“The department must do better than this,” Woods said. ‘Any future rulemaking must adhere to the text of the FLSA and Supreme Court precedent.”

According to Shapiro and 17 other state Democratic Attorneys General who sued the department in February, the rule reduced the amount of back wages that employees were able to collect when an employer doesn’t comply with the FLSA, which the department conceded in the final rule. State Attorneys General contended the rule would increase the costs of state agencies addressing worker concerns.

“The joint employer rule would have done untold harm to workers’ wages and made it harder to hold bad actors accountable, and I am pleased that the court found that it was unlawful,” Shapiro said in a statement this week from the Office of the Attorney General.

Local attorneys said in interviews this week the rule may have provided more clarity and a consistent standard for litigating joint employer cases. But the rule was a text-book example of violations to existing federal statutes.

“If you can’t get over the ‘arbitrary and capricious’ bar then you need to you need to do your homework…and you probably deserve to lose,” Dennis Whitaker, a partner with Hawke McKeon and Sniscak in Harrisburg, said in an interview Wednesday.

Jill Sebest Welch, a partner with Barley Snyder’s employment practice, said the court’s ruling could mean that employers that subcontract with another employer could be unexpectedly responsible for the subcontractor’s missteps. Welch said ongoing disputes from one presidential administration to the next make for an uncertain future for businesses considering their exposure to liability.

“I guarantee you we probably have members that are under the definition of joint employers and had no idea they were, so they were now opened up to liability they didn’t realize they had,” Welch said. “Now we don’t really know where the pendulum is going to swing next.”

Welch said she expects the department to appeal the decision.

Department officials did not respond to requests for comment Thursday.

Karen Harned, executive director of the National Federation of Independent Business (NFIB), who submitted a comment in favor of the department’s rule, said the trade group was “very disappointed” by the outcome. For the NFIB, whose members have an average of roughly 10 employees, the Obama administration’s economic dependence guideline was more arbitrary and capricious because it opened small businesses to lawsuits and skirted the formal procedure of agency rulemaking.

“I find it ironic and disturbing that this judge is saying the Trump administration didn’t do enough when it went through every bell and whistle you could find to undo the signing of an interpretation letter that was done under the previous administration,” Harned said.