2nd Circ. Invalidates Part of DOL’s Joint Employer Final Rule

Friday, September 11, 2020

On September 8, 2020, a federal district court docket struck down the U.S. Division of Labor’s (“DOL”) Closing Rule on joint employer legal responsibility, concluding that the Rule violated the Administrative Process Act (“APA”) by impermissibly narrowing the definition of joint employment beneath the Truthful Labor Requirements Act (“FLSA”), departing from the DOL’s prior interpretations on joint employment with out ample rationalization, and in any other case being arbitrary and capricious. We beforehand blogged concerning the particulars of the Closing Rule right here. The DOL printed the Closing Rule within the Federal Register on January 16, 2020 with an efficient date of March 16, 2020.

What’s Joint Employment?

Joint employment is the precept that a person employee can have a number of employers, all of that are probably chargeable for guaranteeing FLSA compliance. The joint employment doctrine has an extended and well-developed historical past, together with quite a few interpretative steering paperwork issued by the DOL and a large number of court docket selections. These numerous interpretations at their core have defined {that a} joint employment relationship is predicated on “financial actuality” that takes under consideration numerous non-exclusive and non-dispositive circumstances surrounding the connection between the employee and the putative joint employer. Earlier than the Closing Rule, the DOL had instructed, and courts had likewise discovered, that whereas an employer’s formal or oblique proper to “management” a employee within the office is usually a contributing, and even independently decisive, consider figuring out the existence of a joint employment relationship, it’s not the one or essentially dispositive issue. Slightly, the financial actuality is predicated, partly, on a dedication of whether or not a employee economically is dependent upon a putative joint employer.

How Did the Closing Rule Change the Evaluation of Joint Employment?

The DOL posited two joint employment situations, what it describes as “vertical joint employment” and “horizontal joint employment.” In keeping with the Closing Rule, vertical joint employment exists the place the worker has an employment relationship with one employer, e.g., a staffing company or subcontractor, whereas horizontal joint employment exists the place the worker has employment relationships with a number of and associated or related employers. The DOL in its Closing Rule arguably departed from the financial actuality evaluation, adopting a four-factor balancing check for evaluating potential vertical joint employment relationships centered completely on management (derived from a Ninth Circuit resolution in Bonnette v. California Well being & Welfare Company, 704 F.second 1465 (ninth Cir. 1983)), which incorporates whether or not the putative joint employer (i) hires or fires the employer, (ii) supervises and controls the worker’s work schedule or circumstances of employment to a considerable diploma, (iii) determines the worker’s price and technique of fee, and (iv) maintains the worker’s employment data. The DOL has acknowledged that it supposed the Closing Rule to offer readability by casting a uniform joint employment customary to keep away from disparate interpretations by circuit courts all through the nation.

What Was the Foundation of the Lawsuit to Vacate the Closing Rule?

In response to the Closing Rule, sure jurisdictions, together with New York, Pennsylvania, California, Colorado, Delaware, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, Oregon, Rhode Island, Washington, Vermont, Virginia, and the District of Columbia, filed go well with to vacate it and to enjoin its implementation beneath the APA, which units forth the procedures by which federal companies are accountable to the general public and their actions topic to evaluate by courts. Pursuant to the APA, company actions, together with guidelines, could also be put aside if they’re arbitrary, capricious, an abuse of discretion, or in any other case not in accordance with regulation. The events filed cross motions for abstract judgment to resolve the destiny of the Closing Rule.

U.S. District Decide Gregory Woods for the Southern District of New York discovered that the Closing Rule’s adjustments to horizontal joint employer legal responsibility are severable, and that as a result of the Closing Rule makes solely “non-substantive revisions” to current regulation for horizontal joint employer legal responsibility, they’ll perform independently from the adjustments to vertical joint employer legal responsibility. Decide Woods, nonetheless, granted the Plaintiffs’ movement to vacate the Closing Rule because it pertains to vertical joint employment. The court docket discovered quite a few infirmities, faulting the DOL’s utility of various exams for “main” and “joint” employment the place the FLSA doesn’t present a separate definition of, or check to find out, joint employment. Decide Woods additional opined that the Closing Rule’s check for joint employment is impermissibly slim the place the 4 components are actually simply “a proxy for management,” which is inconsistent with the DOL’s earlier interpretive steering, in addition to a major physique of case regulation.

Notably, Decide Woods acknowledged that an company rule is “entitled to a measure of respect, and the burden accorded to such interpretations is dependent upon their thoroughness, validity, consistency and energy to steer,” however then concluded that the DOL’s interpretation is “unpersuasive, [] conflicts with prior Division interpretations [,] . . . and, [i]n any occasion . . . contradicts the FLSA.” As well as, Decide Woods held the Closing Rule to be arbitrary and capricious as a result of the DOL did not adequately clarify why it departed from its prior interpretations, failed to contemplate consistency throughout the DOL’s current rules, and didn’t adequately take into account the Closing Rule’s value to staff. On this final level, Decide Woods alluded to the DOL’s Discover of Proposed Rulemaking, through which the DOL offered that decreasing the variety of joint employers (by way of issuance of the Closing Rule) wouldn’t have an effect on the wages due workers as a result of such workers might nonetheless get well the wages due from the staff’ main employer. Rejecting this proposition, Decide Woods commented that the DOL’s rationale is “foolish” as a result of taken to its logical conclusion, if (“main”) employers all the time fulfill their authorized obligations, then the Closing Rule serves no function.

What Ought to Employers—or Potential Joint Employers—Do Now?

Whereas it’s unclear whether or not the DOL will attraction the Court docket’s resolution or abandon the Closing Rule and maybe pursue new rulemaking, employers needs to be conscious that, for now, absence of management over staff won’t robotically outcome within the avoidance of joint employer standing. Slightly, courts will consider joint employment by contemplating the general financial actuality of the events’ working relationships, which incorporates, however will not be restricted to staff’ financial dependence on putative joint employers. Accordingly, it’s important that putative joint employers rigorously evaluate their contractual relationships with third events, reminiscent of staffing companies or subcontractors, in addition to the precise working relationships with the employees who’re performing the work for the advantage of the putative joint employers to find out whether or not there’s potential threat of an precise joint employment relationship. In such instances, putative joint employers ought to be sure that they’re aware of the third social gathering employer’s wage and hour practices with respect to the employees at problem to verify that their practices are in compliance with the FLSA and state wage and hour legal guidelines and rules. Putative joint employers also needs to take into account implementing contractual safeguards, reminiscent of representations and warranties with respect to direct employers’ wage and hour practices, in addition to indemnification provisions, to additional defend in opposition to potential joint employer legal responsibility.