Appeals Court Tosses Lawsuit over Trump-Era Joint Employer Rule

By Allen Smith, J.D., and Lisa Nagele-Piazza, J.D., SHRM-SCP November 8, 2021
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A federal appeals court recently dismissed a lawsuit challenging a rule from the Trump administration that clarified when businesses share liability as "joint employers" under the Fair Labor Standards Act (FLSA). The 2nd U.S. Circuit Court of Appeals dismissed the case as moot because the Biden administration rescinded the regulation.

The U.S. Department of Labor (DOL) said it "appreciates employers' desire for clarity and certainty regarding compliance under the act" but maintained that the prior administration's rule was "contrary to the act and longstanding case law and thus did not guarantee enhanced clarity."

The DOL has yet to propose regulatory guidance replacing the prior administration's rule.

"Thus, the somewhat varying joint employer analyses adopted by the federal courts of appeals prior to the joint employer final rule will remain in effect," according to law firm Jackson Lewis. "Moreover, employers must be aware of potentially more stringent or otherwise different standards that may apply to parallel wage and hour claims under state law."

Background

The Trump administration had issued a final rule that employers generally supported because it narrowed the definition of "joint employer" and provided clarity about franchise and contractor relationships.

"The final rule, with practical examples provided in the text, provides a road map as to how an employer can structure relations with vendors to avoid joint employment wage and hour claims if under DOL scrutiny," said Michael Lotito, an attorney with Littler in San Francisco, at the time the rule was issued.

However, a coalition of state attorneys general challenged the rule, claiming that it weakened critical workplace protections. Among other arguments, the coalition said the rule conflicted with the protections Congress intended to provide under the FLSA and that the DOL violated the Administrative Procedure Act's rulemaking process.

In September 2020, a district court in New York invalidated substantial portions of the rule. Then, the Biden administration rescinded the rule—effective Oct. 5, 2021—and chose not to defend it in court. However, several business groups intervened in the litigation in an effort to save the rule.

On Oct. 29, the 2nd Circuit vacated the district court's order and instructed the court to dismiss the case as moot because the rule never took effect.

Businesses Seek Clarity

The rescission makes it more likely that an employer will be determined to be a joint employer and thus be liable under the FLSA for another employer's actions. Under the rescinded rule, the DOL would, when determining if a company is a joint employer, consider whether a business:

  • Hires and fires employees.
  • Supervises and controls employees' work schedules or conditions of employment to a substantial degree.
  • Determines employees' rate and method of payment.
  • Maintains employment records.

The rescinded rule also provided that the following factors do not influence the joint employer analysis:

  • Having a franchiser business model.
  • Providing a sample employee handbook to a franchisee.
  • Allowing an employer to operate a facility on the company's grounds.
  • Jointly participating with an employer in an apprenticeship program.
  • Offering an association health or retirement plan to an employer or participating in a plan with the employer.
  • Requiring a business partner to establish minimum wages and policies on workplace safety, sexual-harassment prevention and other matters.

Many commenters, including the Society for Human Resource Management (SHRM), asserted that the rescinded rule provided clarity and predictability to the regulated community and argued that its rescission would lead to confusion and uncertainty.

The DOL concluded that the rescinded rule included a description of joint employment contrary to its assessment of statutory language and congressional intent. According to the DOL, the withdrawn rule conflicted with established precedent in the courts, and therefore "presented employers with the difficult choice of conducting their business in a manner consistent with circuit precedent or with the rule."

Additionally, the DOL said the rule "specifically excluded any consideration of the employee's economic dependence on the potential joint employer" and "improperly narrowed the test for vertical joint employment."

Vertical joint employment exists when a worker has an employment relationship with one employer (typically a staffing agency, subcontractor, labor provider or other intermediary employer) while another employer receives the benefit of the worker's labor. The worker is economically dependent on and thus employed by the other employer.

Horizontal joint employment may be present when one entity employs a worker for one set of hours in a workweek and another business employs the same worker for other hours in the same workweek. If the two employers jointly employ the worker, the hours worked by that person for both employers must be aggregated for the workweek and the employers are jointly liable for FLSA violations.

Implications of Joint Employer Status

The FLSA requires most employers to pay employees at least the federal minimum wage, as well as an overtime premium for all hours worked beyond 40 in a workweek. Business entities and individuals are liable for paying minimum wage and overtime premiums if they meet the definition of "employer," which the FLSA defines as "any person acting directly or indirectly in the interest of an employer in relation to an employee."

Under the FLSA, employees may have one or more joint employers, in addition to their direct employer, that are jointly and severally liable along with the primary employer to pay wages.

What will happen to the definition of "joint employer" going forward?

"Ultimately, it is uncertain how the Biden DOL will interpret joint employer status following its rescission of the Trump-era rule," according to law firm Day Pitney. "Prior to the Trump-era rule, courts implemented a variety of multifactor tests in interpreting joint employer status. Following the rescission of the Trump-era rule, courts are now likely to return to applying their previous frameworks, at least until the DOL issues a new rule relating to joint employer status."

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