New York, 16 Other States Sue Over DOL Joint-Employer Rule (2)

A coalition of Democratic state attorneys general asked a federal judge to block a recent Labor Department regulation that narrows the circumstances in which multiple businesses share liability for wage violations.

Seventeen states and the District of Columbia allege the department’s new joint-employer rule, which is set to take effect March 16, is arbitrary and capricious under the Administrative Procedure Act. The case was filed Wednesday in the Southern District of New York.

The lawsuit represents the latest blue-state bid to knock down Trump administration policies in the courtroom, though the battleground state of Pennsylvania joined New York in leading the challenge. The joint-employer rule, a top priority for the White House and the business community, was hailed by conservative lawmakers for correcting uncertainty they say was caused by the Obama administration’s expansive, worker-friendly interpretation.

The Labor Department’s rule would limit the circumstances in which multiple businesses can be liable under the Fair Labor Standards Act for failing to pay minimum wages and overtime. McDonald’s and AT&T’s DirecTV are among the companies that have faced questions over joint-employment liability in recent years.

Central to the final rule is DOL’s adoption of a four-part test for assessing 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 the test contravenes Congress’s intent, in the FLSA, to establish a broad interpretation of employer, the states argued in the lawsuit. They pointed to a 1946 Supreme Court decision involving workers at a Kansas City slaughterhouse, in which the justices said employment should be interpreted based on the entire circumstances rather than “isolated factors.”

The rule “makes workers even more vulnerable to underpayment and wage theft,” the states said. The regulation “provides an incentive for businesses best placed to monitor FLSA compliance to offload their employment responsibilities to smaller, less-sophisticated companies with fewer resources to track hours, keep payroll records, and train managers.”

DOL representatives didn’t immediately respond to a request for comment.

Franchisers Fire Back

Proponents of the rule, including large restaurant and hotel franchisers, have been gearing up by discussing plans to offer training materials and software to their franchisees and other affiliated businesses, which often lack the resources and sophistication available at brand headquarters. Previously, the risk of class actions alleging a corporation is jointly liable for paying employees wages owed for off-the-clock work prevented some companies from providing these services to their contractors.

Plaintiff attorneys in prior litigation have cited a former DOL administrator’s interpretation, issued by Obama administration wage chief David Weil, that advocated for broad application of joint employment under the FLSA. That document was summarily withdrawn in 2017 by President Donald Trump’s first labor secretary, Alexander Acosta, who argued it was invalid because it didn’t go through the public notice-and-comment process.

The DOL under President Trump said it wanted to clarify the law for companies facing or at risk of such class-action lawsuits.

“It’s unfortunate but unsurprising that the same group of attorneys general who opposed the rule from the outset are now filing suit,” said Stephen Worley, a spokesman for the International Franchise Association, in an email. “The new DOL rule makes it easier for franchise brands and franchise businesses to work together to improve employee training and benefits—it’s a shame that these AGs are spending their constituents’ tax dollars to try to stop that.”

States Allege Harm

Before the coalition of state attorneys general can persuade a federal judge to set aside the rule, they may first have tackle questions about whether they have legal standing to sue.

The states allege they will be harmed by the rule for several reasons, including decreased worker wages, reduced tax revenue, and significant anticipated administrative expenses.

“Plaintiffs are aggrieved by Defendants’ actions and have standing to bring this action because the Final Rule harms their sovereign, quasi-sovereign, economic, and proprietary interests and will continue to cause injury unless and until the Final Rule is vacated,” the states wrote in the lawsuit.

The case is New York v. Scalia, S.D.N.Y., No. 20-01689, complaint filed 2/26/20.