A New York federal district court recently issued a ruling addressing whether the Department of Labor’s (DOL) final rule—that narrowed the definition of joint employment under the Fair Labor Standards Act (FLSA)—violated the Administrative Procedure Act (APA). The court found that the new rule did in fact violate the APA, that it ignored the FLSA’s broad statutory definitions, and that it failed to explain how its benefits outweigh the potential costs to workers. On that basis the court struck down portions of the new rule.
Background
The DOL has long recognized that multiple employers may qualify as joint employers under the FLSA. Joint employers are jointly liable for damages for FLSA violations. Earlier this year, the DOL issued its final rule revising the standard for joint employment under the FLSA. The final rule adopted a four-factor balancing test. The factors are whether the putative joint employer: 1) hires or fires the employee; 2) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; 3) determines the employee’s rate and method of payment; and 4) maintains the employee’s employment records.
The weight given to each factor is based on how that factor suggests control in a given case. As a result, the touchstone of the joint employer analysis under the DOL’s final rule is control. Further, a potential employer must—directly or indirectly—exercise one or more of these indicators of control to be jointly liable under the FLSA. Thus, the DOL’s final rule requires actual control.
Following the issuance of the rule, multiple States sued to vacate the DOL’s final rule and prevent its implementation. The parties filed cross motions for summary judgment asking the court to end the case in their favor. The court ruled in favor of the Plaintiffs on certain provisions, striking down the provisions related to “vertical” joint employer situations (e.g., situations where an employee works for a contractor—the contractor is hired by a corporation—and the contractor fails to pay the employee the minimum wage, as required by the FLSA). This article will focus on the court’s decision to strike down those provisions.
Court’s Decision
First, the court ruled that the final rule violated the APA because it conflicted with the FLSA. The court found that the final rule conflicted with the FLSA because it ignored the FLSA’s broad definitions. Under the FLSA, an “employee” is defined as any individual employed by an employer. The FLSA defines “employ” as “to suffer or permit to work.” The court held that the DOL based its final rule solely on the definition of “employee” but ignored the definition of “employ” under the statute. Relying on the legislative history, and prior interpretations, the court found that the FLSA applies to indirect employers that suffer or permit employees to work. The court held that since the DOL failed to read the FLSA’s definition of “employer” in light of its definition of “employ,” the interpretation conflicts with the statutory language of the FLSA.
Next, the court ruled that the DOL’s final rule violated the APA because it is “arbitrary and capricious.” The “arbitrary and capricious” standard is a legal ruling where a court finds that a rule is invalid because it was made on unreasonable grounds or without proper consideration of the circumstances. In this case, the court found that the DOL’s final rule was “arbitrary and capricious” because it failed to adequately explain its inconsistency with prior joint employment interpretations, it did not consider the conflict between the new rule and the Migrant and Seasonal Agricultural Workers Protection Act (MSPA), and it did not consider the added costs to workers.
As mentioned above, the court did not strike down the entire rule. The court held that while the test for “vertical” joint employment must be set aside under the APA, the test for “horizontal” joint employment (e.g., where an employee has employment relationships with two or more employers that are sufficiently associated with respect to the employee) could stand. As such, the new rule and factors are still applicable to horizontal employment situations.
Takeaway
While this decision is a setback for employers, it is narrowly limited to the Southern District of New York. The DOL’s Wage and Hour Division has stated that the Department believes that its joint employment interpretation is correct, despite this Court’s ruling. This is an indication by the DOL that the ruling may likely be appealed. Employers should pay close attention to future decisions by the courts for more clarity in addressing this issue. While awaiting such future decisions, employers may proceed with implementing and relying upon the new rule in the context of horizontal joint employment situations. In the context of vertical joint employment situations, however, the applicability of the new rule is in question and, therefore, attention must still be paid to the prior rule and standards regarding such vertical joint employment situations.
R. Eddie Wayland is a partner with the law firm of King & Ballow. You may reach Mr. Wayland at (615) 726-5430 or at rew@kingballow.com. The foregoing materials, discussion and comments have been abridged from laws, court decisions, and administrative rulings and should not be construed as legal advice on specific situations or subjects.