Labor & Employment Law Daily DOL overreached in narrowing definition of joint employment, federal court rules
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Friday, September 11, 2020

DOL overreached in narrowing definition of joint employment, federal court rules

By Ronald Miller, J.D.

In enacting the FLSA, Congress adopted broad definitions of the terms “employ,” “employee,” and “employer” that brought a broad swath of workers within the statute’s protection.

Finding that the Department of Labor’s interpretation for vertical joint employer liability conflicted with the FLSA and was arbitrary and capricious, a federal district court in New York granted summary judgment in favor of a group of states that challenged the DOL’s Final Rule on joint employer status. The district court found that the Final Rule conflicts with FLSA because it ignores the statute’s broad definitions. While the department reasoned that section “3(d) alone determines” if an employee has a joint employer, the court found that the FLSA’s definition of “employer” cannot be read untethered from its related definitions of employee” and “employ.” Further department failed to adequately justify its departure from its prior interpretations. However, the court determined that the Department’s non-substantive revisions to horizontal joint employer liability are severable, so that 29 C.F.R. § 791.2(e) remains in effect (State of New York v. Scalia, September 8, 2020, Woods, G.).

Vertical joint employment. In January 2020, the Department of Labor issued a Final Rule that narrows the definition of joint employment under the FLSA. Eighteen states “sued ‘to vacate the Final Rule and enjoin its implementation’ because the Final Rule” violates the APA. In Scalia I, the court denied the DOL’s motion to dismiss. At this juncture, the parties have filed joint motions for summary judgment. The Final Rule maintains the distinction between vertical and horizontal employment,29 C.F.R. § 791.2. This lawsuit focused on the Final Rule’s revisions to the standard for vertical joint employment.

The Final Rule “adopt[s] a four-factor balancing test derived from Bonnette v. California Health & Welfare Agency.” The factors are whether the putative joint employer “(i) hires or fires the employee; (ii) supervises and controls the employee’s work schedule or conditions of employment to a substantial degree; (iii) determines the employee’s rate and method of payment; and (iv) maintains the employee’s employment records.” Thus, control is the touchstone of the joint employer analysis under the Final Rule. “[T]he potential joint employer must actually exercise—directly or indirectly—one or more of these indicia of control to be jointly liable. The Final Rule requires ” actual . . . control.” Economic dependence is irrelevant under the Final Rule.

Standing.Scalia I held the states had plausibly alleged that they had standing because they alleged that “the Final Rule will reduce their tax revenue and increase their administrative and enforcement costs.” At the summary judgment stage, the court had to determine whether the evidence put forward by the states to see if they established standing. Here, the states established that the Final Rule will increase their administrative costs. “Monetary expenditures to mitigate and recover from harms that could have been prevented absent an agency action are precisely the kind of ‘pocketbook’ injury that constitute an injury to a proprietary interest for standing purposes.”

The states also showed that the Final Rule will increase their enforcement costs for state-level analogues of the FLSA. Many states will continue to enforce a broader standard for joint employer liability under analogous state laws. So to maintain the same level of protection for their workers, the states must increase the resources they devote to state-level analogues of the FLSA. Further, the matter was ripe for review. The Final Rule is in effect, so any delay in review would cause hardship to the States. Moreover, because the Final Rule is final, judicial intervention would not interfere with any ongoing administrative action.

Zone of interests. The court also found that the states fell “within the zone of interests encompassed by the FLSA, as channeled through the APA.” Because the states collect taxes on wages, the states’ interest in protecting their tax base perfectly coincides with their interest in ensuring workers in their jurisdictions are compensated fairly. The states have also satisfied the zone-of-interests test because they have shown that “the Final Rule will reduce their tax revenue and increase their administrative and enforcement costs.”

Conflict with FLSA. With respect to the Final Rule, the court concluded that it conflicted with the FLSA. The court pointed out that the Final Rule has two major flaws. First, the DOL relied on the FLSA’s definition of “employer” as the sole textual basis for joint employment liability. Second, the department distinguished the test for whether an entity is an “employer” from the test for whether the entity is a “joint employer.” Both those decisions contradict the text of the FLSA, prior department interpretations of the FLSA and the MSPA, and caselaw from the Supreme Court and lower courts.

The Final Rule adopts its test for joint employment based solely on the FLSA’s definition of “employer.” It thus determined that the FLSA’s definition of “employ” and “employee” are irrelevant to the joint employment analysis. The first problem is that FLSA’s definition of “employer” includes its definition of “employee.” An employer “includes any person acting directly or indirectly in the interest of an employer in relation to an employee[.]” And the definition of “employee,” in turn, includes the FLSA’s definition of “employ.” So all three definitions are relevant to determining joint employer status under the FLSA.

Primary versus joint employers. Another problem with the Final Rule was that it applied different tests for “primary” and “joint” employment. Under the Final Rule, “sections 3(e) and 3(g) determine whether an individual worker is an employee under the [FLSA].” But the department reasoned that section “3(d) alone determines” if an employee has a joint employer. Again, the department’s “interpretation separat[es] sections 3(e) and (g) from section 3(d)[.]” However, the FLSA does not separately define a “joint employer.” Thus, the FLSA’s text does not support the department’s interpretation.

There is no independent test for joint employment under the FLSA. An entity is an employer if it meets the FLSA’s definition. It is a joint employer if it meets the definition and another entity also meets the definition.

The Final Rule ignores the congressional choice to use “includes” in section 3(d). By introducing the definition of employer with “includes,” Congress clarified that it is sufficient for employer status if an entity “act[s] directly or indirectly in the interest of an employer in relation to an employee.” But the Final Rule converts this into a necessary condition: A second employer “is the employee’s joint employer only if that person is acting directly or indirectly in the interest of the employer in relation to the employee.” The department failed to recognize that the FLSA’s definition of “employer” is illustrative. Thus, the department’s interpretation overreads section 3(d).

“Suffer or Permit To Work” Standard. The FLSA’s definition of “employ” must be relevant to the joint employer inquiry. The Final Rule ignored the history of “[t]he ‘suffer or permit to work’ standard.” the FLSA’s definition of employ “derives from state child-labor laws designed to reach businesses that used middlemen to illegally hire and supervise children.” This was a joint employment scenario. Congress adopted section 3(g) to disrupt the nation’s sweat-shop system to reach clothing manufacturers that contracted with sweat-shops to produce their wares. Another joint employment scenario. Thus, a key purpose of section 3(g) was to expand joint employer liability.

However, the Final Rule flouts this purpose. The Department concluded that section 3(g) was irrelevant to a joint employment analysis. That contradicts the plain text of the FLSA. Congress adopted section 3(g) to expand joint employer liability. The sweeping definition of employ in section 3(g) informs the interpretation of section 3(d). Read alongside section 3(g), the most persuasive interpretation of section 3(d) is that it buttresses the “suffer or permit to work” standard.

Control. Other flaws in the Final Rule found by the court include that the Department’s test for joint employer liability is impermissibly narrow. “[T]o be a joint employer under the [Final Rule], the [putative joint employer] must actually exercise—directly or indirectly—one or more of the four control factors.” That standard follows the common-law employment standard, which focuses on control. But the FLSA “expressly reject[s] the common-law definition of employment, which is based on limiting concepts of control and supervision.” The conclusion that an employer satisfies “one or more of the control factors” is a necessary condition for an entity to qualify as a joint employer conflicts with the FLSA. Thus, the Final Rule is impermissibly narrow.

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