Federal District Court Reverses DOL’s “Final Rule” on Vertical Joint Employment By Reverting to FLSA Economic-Realities Test

On September 8, 2020, in a case entitled State of New York et al. v. Scalia etal. (Case No. 1:20 cv-01689-GHW), the U.S. District Court for the Southern District of New York rejected the U.S. Department of Labor’s (“DOL) “final rule” (the “Rule”) concerning vertical joint employment under the Fair Labor Standards Act (“FLSA”). Here is a link to the District Court’s opinion: https://cases.justia.com/federal/district-courts/new-york/nysdce/1:2020cv01689/533016/74/0.pdf?ts=1591176124.

The Rule, issued by the DOL in January 2020 after over a year of public comment and internal debate, narrowed the test for “vertical” joint employment under the FLSA. The DOL largely derived the Rule from California’s four-factor joint employment test commonly known as the Bonnette factors/test (taken from the case entitled Bonnette v. California Health & Welfare Agency, 704 F.2d 1465 (9th Cir. 1983), in which the U.S.Court of Appeals for the Ninth Circuit ruled that state and county agencies were jointly liable as “employers” of in-home supportive services workers for purposes of the minimum wage provisions of the FLSA).

As brief context, vertical joint employment occurs when (1) two or more entities simultaneously benefit from the services performed by the same worker, and (2) each entity exercises or retains the ability to exercise some level of control over the terms and conditions of the working relationship with that worker. The most common examples of vertical joint employment occur in staffing agency, employer of record, subcontractor, and franchise relationships.

The DOL’s vertical joint employment / Bonnette-factors Rule focused on the entity’s degree of control over the worker by examining and weighing the ability to hire and fire, the right to supervise the employee’s work schedule, authority over the worker’s pay, and maintenance of employment records. The DOL has historically applied the economic-realities test to this issue which examines the totality of the working relationship between the worker and the potential joint employer to determine whether the economic realities show that the employee is economically dependent on the potential joint employer.

In sum, the District Court concluded that the DOL’s reliance on the FLSA definition of “employer” in its Rule to narrow the joint-employer test ignores the well-established principle that the FLSA’s terms must be interpreted expansively to meet the FLSA’s broad remedial purpose. The District Court explained that this purpose is achieved by defining the joint-employment relationship based on the economic dependence of the worker, not restricting it to a four-part test based entirely on control.

It remains to be seen whether the DOL will appeal this decision. At least for now, companies engaged in multi-party, staffing, contingent workforce management and franchisor/franchisee relationships, must be vigilant about the economic realities that define vertical joint employment. More times than not, vertical joint employment is an unavoidable reality for those involved in these types of working relationships. This is why companies looking to outsource contingent workforce management must seek robust indemnity provisions and additional-insured coverage from well-established staffing and employer of record vendors to provide financial protection when, not if, joint employment-related liability occurs.

We here at Scherer Smith & Kenny LLP remain available to address any questions you may have related to these or other employment- or business-related issues. For additional information, please contact Denis Kenny atdsk@sfcounsel.com, Ryan Stahl at rws@sfcounsel.com, or John Lough, Jr.,at jbl@sfcounsel.com.

– Written by Denis Kenny