DOL’s Joint Employer Shift Designed to Withstand Legal Challenge

A proposed change to how the Department of Labor determines joint employer classification is primed to withstand the kind of judicial review that struck down its predecessor from the first Trump administration.

The proposal, released by the DOL’s Wage and Hour Division on Wednesday, is the agency’s first foray into an issue closely watched by the franchise industry and others since the Biden administration rescinded a business-friendly Trump 1.0 rule. That regulation required companies to exert “actual” control over another employer’s workers to be jointly liable for labor and employment law violations.

Attorneys say the proposed rule addresses fatal issues that led to the 2020 rule being largely vacated by the US District Court for the Southern District of New York.

“It’s not one of those rulemakings that seems intended to change the way we do things,” said Brett Bartlett, a partner at Seyfarth Shaw LLP. “It shows a lot of thought by the department and a recognition that challenges always come up in court so why would they take a chance on something novel that might get knocked down?”

Clarifying joint employment is one of the DOL’s major rulemaking goals, despite broader Trump administration deregulation mandates.

Reserved vs. Actual Control

The biggest difference between the latest proposed rule and its predecessor is the consideration of power wielded by a company over another employer’s workers, also called “reserved” control. The DOL now says it should be considered, but takes a back seat to control that’s actually exerted.

That’s in stark contrast to the most controversial part of the 2020 rule that emphasized actual control—the focus of a lawsuit launched by 18 states in a New York federal court.

Judge Gregory H. Woods of the Southern District of New York struck down the rule, finding that requiring an employer to exercise actual control to qualify as a joint employer—rather than merely reserving the right to—makes it inconsistent with the Fair Labor Standards Act.

Woods also held that the prior joint employer rule was “arbitrary and capricious” and inconsistent with the FLSA because it strayed from the DOL’s previous stance, which had emphasized the law’s broad definition of “employ” as “to suffer or permit to work.”

Marty Heller, partner at Fisher Phillips LLP, said the newly-proposed standard is consistent with precedent across circuits, adding that he couldn’t recall a scenario where a court granted joint-employer status based on reserved control alone.

“You can try to say that some reserved right to control that’s never exercised is relevant but it’s a lot harder to make that argument than it is to argue that an employer that is regularly exercising control is a joint employer,” he said.

Four Factors

The new proposal calls for the consideration of four key factors, although the DOL notes that the list isn’t “exhaustive.”

They are: whether a company has the power to hire or fire a worker; supervises or controls a worker’s schedule or conditions of employment to a substantial degree; determines the rate and method of payment; and maintains a worker’s employment records.

Some circuit courts use additional factors, including the permanency of the agreement between the two companies, where the work is performed, and whether a contractor is economically reliant on the other company.

Worker-side advocates argue that limiting the factors could allow businesses to shirk their responsibilities in preventing illegal practices, especially as the labor market becomes increasingly reliant on staffing agencies and contractors.

“Focusing on those four factors as evidence of joint employment really does not account for the way it shows up in the modern economy,” said Laura Padin, director of work structures at the National Employment Law Project.

Employer advocates, particularly those lobbying for franchises, have been calling for a standard that simplifies the factors considered and de-emphasizes indirect control.

“If franchisers are not engaging in those employment considerations, then they’re not relevant in these conversations,” said Michael Layman, head advocacy officer for the International Franchise Association.

Changed Legal Landscape

If the proposed standard is finalized and challenged, it will likely go before a judiciary that is more skeptical of agencies’ regulatory actions but also holds less power to issue nationwide injunctions.

However, the US Supreme Court continues to allow broad orders vacating policies under the Administrative Procedure Act, which was raised in the lawsuit against the first Trump joint employer rule.

Bartlett said the DOL’s proposed regulation doesn’t have any glaring holes that could be attacked by a challenger seeking to strike it down.

“I don’t think that there’s going to be an outright dismissal of this because it’s well reasoned, thoughtful, and it doesn’t strike out and try to make novel changes to the law,” he said.

Combining Regulations

Attorneys also welcomed the agency’s effort to apply the joint employer standard to the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act, echoing the agency’s independent contractor proposed rule.

Andrew Rogers, the DOL’s wage and hour administrator, said in a call with reporters Wednesday that court considerations of joint-employment vary widely between the FMLA and MSPA, and the department hasn’t issued any guidance on that issue over the past five years.

While courts generally consider the definition of joint employer to be similar across certain laws, attorneys say it’s helpful to have them all line up in the regulations.

“Clarity and uniformity matter, even if we don’t love what that rule might be,” Bartlett said. “The standard for joint employer status under the FMLA and the FLSA are the same, that eliminates an additional step of us having to go out and look for case citations for both. So if there’s a consistent standard, no matter what the political paradigm is moving forward, that’s a good thing.”