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Understanding Recent Changes to the DOL Joint Employer Test

Restaurant franchisors need to take heed.

The guidelines, issued by the United States Department of Labor (DOL) to assist employers including restaurants owned jointly with or managed by other companies, recently have been thrown into question by a New York federal district court. Joint employer liability is a doctrine used to hold one entity liable for the employment and labor obligations of another entity under common control or managed as a nominally separate operation.

As part of its authority, the DOL issues rules and guidance to interpret laws including the federal wage and hour law called the Fair Labor Standards Act (FLSA). The DOL does not have authority to make law, and although its rules are not binding upon the courts, DOL rules can be influential and used by courts to interpret statutes. This latest court decision may leave employers guessing how to assess their legal status under the joint employer rules.

On September 8, a Southern District of New York judge struck down part of the DOL’s joint employer rule issued in 2020 after the DOL overhauled its prior interpretation of the joint employer rule. The DOL revamped its earlier position to narrow the rule after another federal agency—the National Labor Relation Board (NLRB)—also took on the joint employer test to expand it ultimately to be reversed in the courts. Consequently, the portion of the DOL’s joint employer that the New York court just invalidated may be the subject of an appeal by the DOL or further review and refinement by the DOL to comport with the New York court’s declaration. 

In January 2020, the DOL diminished the potential for joint employer status by issuing a final rule (2020 DOL Rule) that created a four-factor balancing test—which essentially required an indirect employer to exercise significant control over the alleged employee’s employment, including hiring and firing, supervision, setting pay, maintaining records and setting schedules—to trigger joint employer liability.

The 2020 DOL Rule, which took effect in March 2020, marked a stark departure from the DOL’s legal interpretation of joint employer liability under the Obama administration as well as the position by a sister federal agency, the NLRB in its ruling in the Browning-Ferris line of NLRB cases that pronounced a lower threshold for joint employment status. The DOL and the NLRB both adopted a stance that direct control of an employee is not required; rather if an indirect employer reserved the ability to control the employee, it sufficed to establish joint employer liability.

In State of New York v. Scalia, 2020 U.S. Dist. LEXIS 163498 (S.D.N.Y. Sept 8, 2020), Judge Gregory Woods granted partial summary judgment in favor of a coalition of 17 states and the District of Columbia finding that the 2020 DOL Rule was “arbitrary and capricious.” In doing so, the court determined that the 2020 DOL Rule improperly limited the FLSA definition of employer by narrowing the FLSA definition.

Under the FLSA, “employ” is defined as “suffer or permit,” which specifically applies to indirect employers or those without “direct” control.  Additionally, Judge Woods stated that the DOL ignored the important history of the FLSA and explained that the FLSA’s broad definition of employment was originally crafted to stop a company from avoiding liability by using middlemen to hire employees, particularly in the child labor context. Judge Woods stated that the 2020 DOL Rule disregards this important history.

The court further questioned the reasoning for the DOL’s change in stance and noted “if the Department departs from its prior interpretation it must explain why,” 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 Rules does none of these things, it is legally infirm.” In the end, the court concluded that the 2020 DOL Rule conflicted with the FLSA’s definition of employment to allow an alleged joint employer to side-step liability by not exercising direct control resulting in substantial harm to an employee. 

While the Court rejected the 2020 DOL Rule as it applies to “vertical employment” relationships (those situations where the employee has a direct employer, but is also economically dependent on another employer, such a subcontractor/contractor or staffing agency), the court upheld the 2020 DOL Rule only as it applies to “horizontal employment” relationships (those situations where an employee has an employment relationship with two or more “sufficiently associated” employers, which are separate but related corporations, such as a franchisor/franchisee relationship). 

Whether or not the DOL will appeal the court’s decision still remains to be seen. Regardless, the new ruling and interpretation means that employers should proceed with caution, particularly those involved in a vertical employment relationship. Employers should review their procedures to ensure they are compliant with employment laws affected by the joint employer rule. In particular, franchisors and franchisees (and those with similar employment relationships) likely face additional uncertainty in light of the recent decision in Scalia.

If the previous DOL guidance and Browning-Ferris test (by the NLRB), which permits the mere potential to control employees for joint employer liability, is reinstated then franchisors and employers in vertical relationships likely face a risk of increased liability, even if the company exercises no control over the employees of another entity. As a result, those in vertical employment relationships should structure their employment arrangements and agreements, with the advice of counsel, to minimize any basis to incur joint employer liability. These agreements should be carefully drafted to avoid statements that one company exercises control or retains the right to exercise control over another entity’s employees regardless of the relationship among the parties. 

Mitchell Boyarsky is a partner at Nelson Mullins in New York. He focuses his practice on labor and employment, advising clients on a wide variety of workplace subjects. For more than 25 years, Boyarsky has represented management in workplace law, including matters related to restrictive covenant, wage and hours, executive contract matters, transactional employment matters especially related to mergers and acquisitions, and related employment litigation. He can be reached at mitch.boyarsky@nelsonmullins.com.

Jessica Jeffrey is an associate and member of the litigation team at Nelson Mullins in Boston. She represents clients in various business disputes and employment issues, concentrating her practice on commercial litigation, product liability and employment matters. Jeffrey can be reached at jessica.jeffrey@nelsonmullins.com.