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INSIGHT: New DOL ‘Joint Employer’ Rule—Expect Legal Challenges

April 8, 2019, 8:00 AM

The long-awaited unveiling of the Department of Labor’s proposed regulations on “joint employer” is over.

The DOL April 1 announced its notice of proposed rulemaking to revise and clarify the standards for determining when business arrangements and contractual relationships between an employer and a third party will make the third party jointly responsible to the employer’s employees under the Fair Labor Standards Act (FLSA).

The new rules will reverse course from the Obama administration’s position regarding the standards to be applied to determine whether two or more entities can be deemed as “joint employers” of an employee, thereby making each “employer” responsible for compliance with the minimum wage and overtime laws under the statute.

Legal challenges are expected to come from lawsuits in which employees seeking to recover against more than one entity for alleged FLSA violations will argue that the new rules have neither a binding effect on the courts, nor even persuasive value.

The debate over how much deference, if any, the courts should give to the new rules will revolve around the question of whether the proposed rules amount to “legislative rulemaking” or “interpretive guidance.”

Legislative Rulemaking

If the rules are considered “legislative rulemaking,” the legal argument against enforcement essentially is that the DOL has no authority to change or add to the terms of the statute. That is something only Congress can do, unless it expressly tasks that function to the DOL.

Although Congress has statutorily conferred legislative rulemaking to the DOL in the case of certain overtime exemptions and child labor issues under the FLSA, there is nothing in the statute that gives the DOL any legislative rulemaking authority to define “joint employment.”

In fact, the statute makes no reference at all to “joint employment;” rather, this is a term of art fashioned by the courts when defining the reach of the FLSA in various working arrangements where it appeared that more than one business had control over the wages and working hours of the affected employees.

The House did pass a bill addressing this issue in November 2017, but this bill has not passed the Senate.

Interpretive Guidance

If the DOL’s joint employer rules are considered merely as “interpretive guidance,” the argument for their enforcement is more favorable because the DOL regulations merely would be adding “clarity” to portions of the FLSA that are not clear.

As one former wage and hour division administrator for the DOL stated, clarifying joint employment “will provide better and uniform guidance to the regulated community, and as long as it is reasonable, courts will be compelled to defer to those regulation. Such regulations will bind the regulated community and courts will defer to such regulations whether they are interpretive or legislative.”

In the proposed rules, there is language expressly stating that the rules are intended as interpretive guidance for employers, employees, and for the courts, which have to date adopted varying and inconsistent standards to determine joint employer status.

The most significant portion of the new rules appears in the proposed amendment to 29 CFR §791.2. Here, the amended rules provide that when examining joint employer issues in scenarios where a third party “simultaneously benefits” from work performed by another employer’s employees, the following four factors are examined to determine if the third party is a “joint employer” of those employees:

  1. Whether the third party hires or fires the employee;
  2. Whether the third party supervises and controls the employee’s work schedule or conditions of employment;
  3. Whether the third party determines the employee’s rate and method of payment; and
  4. Whether the third party maintains the employee’s employment records.

The amendment to this section also provides that the “potential joint employer must actually exercise—directly or indirectly—one or more of th[e] [above] indicia of control to be jointly liable under the [FLSA]].”

Clear Departure From Past Position

In other words, “the potential joint employer’s ability, power, or reserved contractual right to act in relation to the employee is not relevant for determining joint employer status.” This is a clear departure from the prior administration’s position on joint employer liability.

During the Obama administration, the National Labor Relations Board held that joint employer liability under the National Labor Relations Act can be imposed on a third party if, among other things, that party reserved the contractual authority—even if not exercised—over another employer’s employees.

Elsewhere in the proposed rules, the DOL states that while the four-part test will be used as a way to determine the “economic reality of the potential joint employer’s status under the [FLSA], whether an employee is economically dependent on the potential joint employer is not relevant.”

The DOL’s statement that “economic dependence” is not a relevant factor in the joint employer analysis is an express rejection of a factor that has been used by a number of courts to determine joint employer status.

In the proposed rules, the DOL provides a number of factual scenarios to illustrate when joint employer status will be found to exist under its four-factor test. These examples make it clear that the business models that customarily are associated with franchise businesses, staffing agencies, and other third-party contracting arrangements will not constitute a joint employer arrangement unless one or more of the foregoing criteria exists.

Legal Challenges Coming

This is yet further evidence of a clear reversal of the legal trend that existed under the prior administration; Hence, we expect there to be a legal challenge to the proposed rules when they are finalized and take effect.

While there are differing schools of thought on the likely success of a legal challenge to the DOL’s proposed rules, it is too early to predict an outcome—there is a 60-day “public comment” period that must occur before the rules can be finalized, and the joint employment issue, while long a subject of lower court cases, is not one that has ever been reviewed by the U.S. Supreme Court.

In January 2018, to the surprise and disappointment of many employment and labor law practitioners, the Supreme Court rejected a petition to review this issue in DirecTV LLC v. Hall, a case involving technicians engaged by home service provider entities to install and repair satellite systems for DirecTV.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Jonathan Turner is a labor and employment partner at Mitchell Silberberg & Knupp in Los Angeles. He advises management on all aspects of labor and employment law, and represents entertainment studios and other employers in labor arbitrations, administrative proceedings, court litigation, union avoidance issues, and collective bargaining negotiations.