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Labor Department Proposes Rescission of its 2020 Joint Employer Rule

On March 12, 2021, the U.S. Department of Labor (DOL), Wage and Hour Division, published a Notice of Proposed Rulemaking (NPRM) in the Federal Register, to rescind its Trump-Era Final Rule on joint employer status -a Final Rule that just went into effect one year ago - on March 16, 2020 (2020 Rule). Some finality on the joint employer rule would be a welcome result for employers and employees, especially given that the NLRB and the EEOC follow separate joint employer rules.


The DOL’s Wage and Hour Division enforces the Fair Labor Standards Act (FLSA), which requires covered employers to pay non-exempt employees at least the federal minimum wage, pay overtime for all hours worked over 40 in a workweek, and maintain certain records. The FLSA does not define “joint employer” or “joint employment”, but Section 3 of the FLSA does provide definitions for “employer,” “employee” and “employ.”


Joint Employer Rule - Background


The joint employment theory of liability has been around since 1939 - the year after the FLSA was enacted. In 1939, DOL’s Wage and Hour Division issued Interpretative Bulletin No. 13, which addressed whether two or more companies may be jointly and severally liable for a single employee’s hours worked under the FLSA. In 1958, the DOL introduced the Rule at 29 C.F.R. Part 791, which stated that joint employment exists if “employment by one employer is not completely disassociated from employment by the other employer(s) . . . [w]here the employee performs work which simultaneously benefits two or more employers, or works for two or more employers at different times during the workweek, a joint employment relationship generally will be considered to exist in [certain] situations…” The 1958 Rule provided examples of when a joint employment relationship existed. From 1958 to 2016, the DOL issued numerous opinion letters, fact sheets, and legal briefs which restated the DOL’s position on joint employer status.


In 2016, DOL’s Wage and Hour Division issued the Joint Employment Administrator’s Interpretation (AI), which explained that “the expansive definition of ‘employ’ as including ‘to suffer or permit to work’ rejected the common law control standard and ensures that the scope of employment relationships and joint employment under the FLSA . . . is as broad as possible.” The 2016 Joint Employment AI explained “Vertical” and “Horizontal” joint employment and provided examples of each scenario. Vertical joint employment existed where the employee has an employment relationship with one employer (typically a staffing agency, subcontractor, or entity that provides contract or temporary workers) and another employer directly benefits from the employee's labor. Here, the FLSA required application of the broader economic realities analysis, not a common law control analysis, in determining vertical joint employment. Horizonal joint employment existed when an employee was separately employed by more than one employer, and worked separate hours in a workweek for each employer, and the employers were sufficiently “associated with or related to each other with respect to the employee” such that they are joint employers. The 2016 AI provided a far more employee-friendly framework with broader reach.


The March 2020 Joint Employer Rule


The 2020 Rule is considered business-friendly, and effectively serves to limit liability for entities involved with an employment relationship, following the previous administration’s goals. Joint employment liability is triggered, in general, only if there exists a degree of “control” over the employee or employee’s terms and conditions of employment. The final rule continues to recognize two potential scenarios where an employee may have one or more joint employers.


In the first scenario, or “vertical” joint employment, the employee has an employer who suffers, permits, or otherwise employs the employee to work, but another individual or entity simultaneously benefits from that work. The Rule provides a four-factor test for determining vertical joint employer status in vertical joint employment situations and include whether the potential 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.


In the second scenario, or “horizontal” joint employment, one employer employs an employee for one set of hours in a workweek, and another employer employs the same employee for a separate set of hours in the same workweek, but the jobs and the hours worked for each employer are separate.


New York Federal Court Vacates the March 2020 Joint Employer Rule


The 2020 Rule became effective on March 16, 2020, and within months, a lawsuit was filed by 17 states and the District of Columbia against the DOL in the U.S. District Court for the Southern District of New York. The International Franchise Association and several other employer groups were granted intervenor-defendant status. The states challenged the 2020 Rule arguing it was contrary to law, and the judge agreed. On September 8, 2020, the Court held that the Rule violated the Administrative Procedure Act because it restricted the Rule to the narrow definition of “employer”, when it should have considered the definitions of “employee” and “employ” as defined by the FLSA, and also Supreme Court caselaw interpreting these definitions. The Court found that the DOL failed to adequately justify its departure from its prior interpretations, stating that the DOL’s “novel interpretation for vertical joint employer liability conflicts with the FLSA and is arbitrary and capricious. But the Department's non-substantive revisions to horizontal joint employer liability are severable, so 29 C.F.R. § 791.2(e) remains in effect. The Court vacates the rest of the revised 29 C.F.R. § 791.2.”


On November 6, 2020, the Trump DOL and Intervenor-Defendants appealed the ruling. New York, et al. v. Scalia, No. 1:20-cv-1689-GHW, 2020 U.S. Dist. LEXIS 163498, at *94 (S.D.N.Y. Sept. 8, 2020), appeal pending, New York, et al. v. Scalia, No. 20-3806 (2nd Circuit, appeal docketed Nov. 6, 2020).


On March 31, 2021, the DOL under Biden filed a Motion with the Second Circuit Court of Appeals requesting a six-month abeyance of the appeal, to allow the DOL time to complete the rulemaking process. This would avoid the needless confusion and protracted litigation, if the Second Circuit were to reverse the district court, reinstating the March 2020 Rule, and a likely appeal to the Supreme Court.


DOL’s 2021 Proposal to Rescind


On March 12, 2021, the DOL proposed to rescind the 2020 Rule and regulations found at 29 C.F.R. Part 791, a decision prompted by the new administration and the New York v. Scalia lawsuit. The DOL now seeks comments on the Proposal to Rescind, which will be considered by DOL while drafting its new Proposed Rule. The DOL hopes to finalize the rulemaking process by the end of 2021. Comments must be submitted by April 12, 2021.


For more information, a copy of any of the documents referenced above, or for assistance preparing and submitting comments by April 12, 2021, please contact Diana Schroeher, at 301-595-3520.


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