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Judge Blocks Labor Department’s Narrowed Joint Employer Test (2)

Sept. 8, 2020, 8:17 PMUpdated: Sept. 8, 2020, 11:01 PM

A federal judge in Manhattan has declared the most consequential elements of the Trump administration’s recent joint employer regulation illegal, halting what’s been a priority for Republicans and the business community.

The Labor Department regulation, which took effect in March, narrows the scenarios in which multiple businesses can be held liable under the Fair Labor Standards Act for failing to pay minimum wages and overtime to workers.

Judge Gregory H. Woods of the U.S. District Court for the Southern District of New York ruled Tuesday that the DOL regulation is “arbitrary and capricious” and inconsistent with the FLSA, setting aside the department’s new standard. The ruling vacates the agency’s new test for vertical employment, referring to when a worker enters an employment relationship with one company, such as at a staffing agency or subcontractor, but is economically dependent on another employer.

The Trump administration’s regulation was issued against the backdrop of conflicting judicial interpretations of the matter—a significant business concern for restaurant franchise owners and large companies that enter into contracts with third parties for janitorial services and temporary staffing, among other arrangements. Corporations such as McDonald’s, Amazon, and Comcast have faced private lawsuits arguing the companies are jointly responsible, along with third-party contractors, for workers’ unpaid minimum wages and overtime.

Woods, an Obama appointee, invalidated the rule on multiple grounds, arguing that it strayed from the Labor Department’s pre-Trump stance, which had emphasized the FLSA’s broad definition of “employ” as “to suffer or permit to work.”

‘Legally Infirm’

“If the Department departs from its prior interpretation, it must explain why,” Woods stated in his opinion. “And it must 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. Because the Final Rule does none of these things, it is legally infirm.”

Woods preserved the DOL’s standard for horizontal employment, or when a worker has separate employment relationships with multiple businesses that are associated with each other. However, horizontal scenarios arise far less frequently than vertical employment, and aren’t the primary source of employer angst about an expanded application of joint employment undertaken since the Obama administration.

“The Department is disappointed in the decision and will review and evaluate our options with the Department of Justice,” a DOL spokesman said in an emailed statement.

A coalition of 17 states and the District of Columbia sued the administration in February over this regulation. Led by Pennsylvania and New York, the Democratic state attorneys general argued that the department’s more restrictive interpretation of joint employment “makes workers even more vulnerable to underpayment and wage theft.”

Central to the final rule is DOL’s adoption of a four-part test to assess whether one company is a joint employer of another company’s workers. The test, which considers all factors collectively, probes whether the potential joint employer hires or fires an employee; supervises or controls work schedules; sets pay rates; and maintains employment records.

But to Woods, that test is “impermissibly narrow.” He said requiring an employer to actually exercise one of the four factors in order to qualify as a joint employer—rather than merely reserving the right to do so—makes the standard inconsistent with the FLSA.

Business Groups Intervene

A DOJ media representative didn’t immediately respond to a request for comment. The Justice and Labor departments will now face pressure from employer advocates to appeal the decision.

The business community could also play a critical role in the outcome of the litigation. A coalition of trade groups, including the U.S. Chamber of Commerce, International Franchise Association, and National Retail Federation, has been approved by the judge to serve as an intervening party in the case.

The trade groups are motivated to ensure the Trump DOL’s joint employer rule is supported in court in the event Democrats seize control of the White House in 2021 while the case is still active.

“This decision will harm small businesses and their employees across the country. It’s unfortunate that, in the middle of a pandemic, this ruling has thrown a wrench into small businesses’ economic recovery,” said Matthew Haller, the International Franchise Association’s senior vice president for government relations and public affairs. “IFA is reviewing all possible options as we consider our next steps to defend the franchise business model.”

The case is New York v. Scalia, S.D.N.Y., No. 20-01689, order 9/8/20.

(Updated with comment from International Franchise Association)

To contact the reporter on this story: Ben Penn in Washington at bpenn@bloomberglaw.com

To contact the editors responsible for this story: Martha Mueller Neff at mmuellerneff@bloomberglaw.com; Jay-Anne B. Casuga at jcasuga@bloomberglaw.com

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