On July 29, the Department of Labor (DOL) announced a final rule rescinding the Trump Administration’s Joint Employer rule. This move clearly reestablishes the DOL’s quest to broaden the scope of potential liability for businesses under the Fair Labor Standards Act (FLSA) for the wrongs of their subcontractors, franchisees and other entities. This move is consistent with the Biden Administration’s trend to reinstate the measures taken under the FLSA by the Obama Administration, including those taken to broaden the scope of who could be deemed joint employers under the FLSA. The rule promulgated by the Trump Administration had replaced an Administrator’s Guidance issued by the Wage and Hour Administrator of the Obama Administration, David Weil. Consistent with this trend, David Weil has been nominated to serve the current administration in the same role he held during the Obama Administration.
Many members of the business community saw the Trump-era rule as providing clarity on whether an entity constitutes a joint employer under the FLSA. The Biden DOL, on the other hand, characterized the rescinded rule as “contrary to statutory language and Congressional intent,” and contrary to the Guidance issued during the Obama Administration. That Guidance though was highly criticized by the business community and the courts as being too broad. The objective of that guidance was to make it easier to hold contracting employers and franchisors liable for the wrongs of employers “lower on the ladder,” thereby finding “deeper pockets” liable and facilitating larger class actions.
The Rescinded Rule Lived an Interesting Life
Under the rescinded rule, an employer would be deemed to be a joint employer with the “direct employer” if, with respect to the employees of the direct employer, it:
(i) Hires or fires the workers;
(ii) Supervises and controls the workers’ work schedules or conditions of employment to a substantial degree;
(iii) Determines the employees’ rates and methods of pay; and
(iv) Maintains the employees’ employment records.
The rescinded rule provided further clarity by eliminating from the analysis such factors as whether the relationship was due to a franchise agreement, whether the franchisor provided sample handbooks to franchisees, whether the contractor’s employees worked on the contracting entity’s premises, whether the employees participated in association health or retirement plans, or whether the business required contractors to conform to minimum wage, workplace safety, sexual harassment and other policies. The current DOL believes the prior administration’s focus on control was too narrow.
The prior rule went into effect in March 2020, but it was enjoined by a federal court in New York in September 2020 due to a belief that the rule was inconsistent with the statute. Under the prior administration, the DOL appealed that ruling to the Court of Appeals and filed its brief shortly before the current administration took office. Rather than being placed in the awkward position of arguing contrary to the position taken in January as the appeal progressed, the DOL asked the court to hold the case in abeyance as the new administration was contemplating a change or rescission to the rule before the court. The court declined to do so. Now that the DOL is formally rescinding the rule, though, it is likely that the DOL will seek to have the case dismissed.
Employers Need to Evaluate their Potential Exposure as Joint Employers
Despite the DOL’s assertions that rescinding the rule will have minimal effect on businesses since it “was not adopted by most jurisdictions,” many employers will be affected by the rescission.
The DOL’s return to an “economic realities” in lieu of a “control” analysis foreshadows an increased effort by the DOL and employees to bring actions for unpaid wages under the FLSA against entities not typically considered to be employers. Employers, especially those who operate under a franchise model or engage many contractors, should therefore review their contracts and employment structures to better position themselves for responding to the scrutiny likely to be undertaken by the DOL and plaintiffs’ attorneys in the coming years. Contracts and basic practices which have been in place for decades may need to be revisited and revised.
Finally, employers need to stay alert to further changes to joint employment. While the DOL has not announced any further rulemaking plans, it did leave that door open if it determines that “alternative regulatory or subregulatory guidance is appropriate.” Will that be vis-à-vis new regulations or a restated Administrator’s Guidance? Time will tell, but for now, it appears that at best employers are required to hold their relationships up to the patch-work of standards varying by circuit court jurisdictions that are otherwise in place, but which the current administration arguably construes more broadly than the courts have typically done in the past. For these reasons, we should expect that the DOL will endeavor to tilt the scales more towards its current interpretations through some formal action.