In a ruling that could have a wide-reaching impact on business sectors, including the restaurant industry, a federal court struck down a major portion of the U.S. Department of Labor’s (DOL) new joint employer rule (the DOL Rule). The DOL Rule, which took effect in March, had narrowed the test for when multiple employers are responsible for wage and hour claims under the Federal Labor Standards Act (FLSA).
The new DOL Rule limited the inquiry to whether the joint employer had actual control over the working relationship. According to the DOL, the purpose of the rule was “to promote certainty for employer and employees, reduce litigation, promote greater uniformity among court decisions, and encourage innovation in the economy.” Eighteen states sued, arguing the DOL Rule was improperly restrictive, excluding too many businesses from joint employer liability. Meanwhile, a coalition of business groups led by the U.S. Chamber of Commerce, International Franchise Association, and National Retail Federation intervened in support of the DOL Rule.
Judge Gregory Woods of the U.S. District Court for the Southern District of New York sided with the states, holding that the new DOL Rule was inconsistent with the broad definitions of “employee” and “employer” under the FLSA.
By way of background, the FLSA does not include a comprehensive test for when a joint employment relationship exists. Conflicting judicial opinions have made it difficult for businesses to determine how to interpret the economic realities test and whether they were “employers” under federal wage laws. Some courts focused on employer control (hiring, firing, setting work schedules and work rules, daily supervision), but others included factors such as ownership of the facility or equipment, degree of investment in the business, the permanence of the working relationship, and the degree of skill required for the work.
The DOL sought to provide guidance. In 2016, the DOL, under the Obama Administration, had issued guidance expressing an expansive view of joint employment, relying on the FLSA definition of employment, which is to “suffer or permit” to work. In 2017, the Trump Administration withdrew this guidance and sought input to create a regulation narrowing the joint employment standard based on the level of employer control. The new DOL Rule focusing on employer control was finalized in January 2020 and became effective in March.
There are generally two types of joint employment relationships—horizontal and vertical. Unaffected by the court’s ruling, “horizontal” employment relationships may exist where the worker has employment relationships with two or more employers, and the employers are sufficiently related with respect to the employee such that they jointly employ the employee.
For example, an employee who works at two restaurants could be jointly employed, even though the restaurants are separate legal entities if the restaurants are owned by the same corporate parent, and the restaurant managers jointly coordinate the worker’s schedule.
Vertical joint employment, the primary issue in this lawsuit, can exist when the employee has an employment relationship with one employer (such as a staffing agency or subcontractor) who contracts with a second business for the employee’s work.
These “vertical” business relationships exist throughout the restaurant industry, where companies routinely use third party contractors to provide a wide variety of work for their businesses and where the franchise model plays a big role.
The DOL Rule set forth a four-factor test for vertical joint employment: whether the potential joint employer “(i) hires or fires the employee; (ii) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; (iii) determines the employee’s rate and method of payment; and (iv) maintains the employee’s employment records.” Under the DOL Rule, each factor is weighed to help determine whether the potential employer exercises actual control, directly or indirectly, over the employment relationship.
The DOL Rule disregarded economic dependence as a factor, making irrelevant to the joint employer inquiry, whether businesses operate as a franchise, owns the property where the other business operates, or is a major investor in the other business and other factors such as worker skill. Thus, under the DOL Rule, many businesses were excluded from joint employer liability on potential wage claims from temporary workers provided by staffing agencies, franchisee employees, and other work provided through subcontractors.
Judge Woods held that DOL Rule was inconsistent with the FLSA’s definitions of employee, employer, and employment. According to the court, those definitions must be read together, so the Final Rule’s reliance solely on the Act’s definition of “employer” was improper. In addition, the court held that contrary to the DOL Rule, there is no distinction between whether a company is an “employer” and whether it is a “joint employer”—an entity either is an employer or it is not. Further, the court held that DOL Rule was too narrow in requiring that “control” factors exist, rather than using control as merely a factor to be weighed in determining whether an employment relationship exists.
The re-emergence of the broader joint employment rule could have significant impact on large and small businesses. Small businesses, who are reliant on staffing partners, are also exposed to increased exposure from claims of temporary workers. Large businesses may become more likely to be on the hook for wage claims stemming from the conduct of their business partners. Such wage claims often turn into class or collective actions that carry significant penalties and damages.
Still, Judge Wood’s ruling is unlikely to be the final word on joint employment relationships under the FLSA. Businesses will continue to seek clear guidance, and it is anticipated that the DOL will appeal the ruling. The ruling will not directly affect the joint employer rules under state laws or under other federal employment laws. For example, the EEOC still maintains a broader separate test for joint employer liability for enforcement on anti-discrimination laws. Meanwhile, the NLRB recently issued separate guidance, creating a slightly different control test with regard to joint employment for labor laws and labor disputes.
Whatever the ultimate result, businesses need to pay close attention to their relationships with third-party employers. And given the present uncertainty, it is especially important for businesses in the restaurant industry to conduct due diligence on potential joint employers, such as staffing agencies and franchisees, examining their focus on compliance and history with wage and hour claims.
Julia Y. Trankiem is a partner with Hunton Andrews Kurth LLP in Los Angeles. She may be reached at JTrankiem@hunton.com.
Matthew Bobb is an associate attorney with Hunton Andrews Kurth LLP in Los Angeles. He may be reached at mbobb@HuntonAK.com.