States can pursue challenge to DOL joint employer rule
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Wednesday, July 1, 2020

States can pursue challenge to DOL joint employer rule

By Payroll and Entitlements Editorial Staff

A lawsuit brought by 18 states challenging the Department of Labor’s final rule narrowing the definition of a joint employer survived the agency’s motion to dismiss. The states plausibly alleged that the final rule will reduce their tax revenue and increase their administrative and enforcement costs for state analogues of the FLSA. Thus, the states had "staked out an entirely plausible theory of injury with the requisite specificity, a federal district court in New York ruled (State of New York v. Scalia, SDNY., 170 LC ¶36,794).

Worker protections. As the court observed, the FLSA was enacted to protect covered workers from substandard wages and oppressive working hours, and labor conditions that are detrimental to the maintenance of the minimum standard of living necessary for health, efficiency and general well-being of workers. The Supreme Court has "consistently construed the Act “liberally to apply to the furthest reaches consistent with congressional direction."

Joint employer principle. The Supreme Court has also "long recognized that two or more entities may constitute joint employers for purposes of the FLSA." Joint employers are responsible, both individually and jointly, for compliance with all of the applicable provisions of the Act, including the overtime provisions. Since 1939, the DOL also has recognized that two employers may be so interconnected that they function as a single, joint employer. In 1954, the DOL first codified the joint employment standard.

Bonnette factors. The Ninth Circuit’s 1983 decision in Bonnette v. California Health and Welfare Agency has played an outsize role in the development of joint employer doctrine. The Bonnette court concluded that four nonexclusive factors "provide a useful framework" for determining whether an entity constitutes a joint employer: "whether the alleged employer (1) had the power to hire and fire the employee; (2) supervised and controlled employee work schedules or conditions of employment; (3) determined the rate and method of payment; and (4) maintained employment records." But some courts go beyond the Bonnette factors.

New joint employer definition. Against this backdrop, the DOL in January 2020 revised its joint employer regulation, expressing concern that the former regulation did "not adequately explain what it means" for two employers to be "completely disassociated" when an employee works for an employer, "and that work simultaneously benefits another person." Under its new final rule, if an employee works for an employer and "another person simultaneously benefits from that work, the other person 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 DOL proposed to adopt a four-factor test derived from Bonnette. The rule explains the agency’s view that "[a]pplication of the four factors should determine employer status in most cases."

Harm to states. In February 2020, the states sued to vacate the rule. Their complaint alleged that the final rule harms their sovereign, quasi-sovereign, economic, and proprietary interests, inflicting substantial and burdensome administrative and enforcement costs on state agencies. Specifically, the states alleged that the final rule will decrease compliance with worker protection laws. Further, they alleged that the ensuing contraction of the wage base within their jurisdictions will directly reduce their tax revenue. Moreover, they assert, the final rule will cause them to incur increased costs from the investigation and enforcement of minimum wage, overtime, and other labor law violations affecting workers in their jurisdictions.

Standing. States may sue "in one of three standing capacities: (1) proprietary suits in which the State sues much like a private party suffering a direct, tangible injury; (2) sovereign suits requesting adjudication of boundary disputes or water rights; or (3) parens patriae suits in which States litigate to protect “quasi-sovereign interests." To establish standing, a plaintiff must have (1) suffered an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be redressed by a favorable judicial decision.

Reduced state revenues. The court concluded that the states plausibly alleged that the final rule will reduce their tax revenue by limiting employer liability under the FLSA, establishing a concrete injury for standing purposes. The final rule limits employers who are liable under the FLSA and so reduces aggregate wages paid to employees in their jurisdictions. In fact, the DOL conceded that the new rule "may reduce the number of businesses currently found to be joint employers" and "may reduce the amount of back wages that employees are able to collect when their employer does not comply with the Act." The expected financial loss to states can constitute the sort of concrete and particularized injury capable of supporting standing.

On top of increasing the prevalence of wage theft, the states alleged that the final rule will result in increased fissuring of workplaces, which will lead to lower wages because employers in fissured workplaces tend to pay less. That, too, will allegedly reduce the states’ tax base. Further, they alleged, the final rule will decrease contributions to their workers’ compensation carriers and unemployment insurance funds. That’s because fissured workplaces are more likely to misclassify workers and evade required payments to workers’ compensation and unemployment insurance funds. Third-party staffing agencies also are subject to lower tax rates for unemployment insurance and workers’ compensation.

The court found that the states had identified a specific revenue stream that they plausibly linked directly to the final rule sufficient to allege an injury in fact. Moreover, this anticipated loss of tax revenues was also fairly traceable to the final rule. Thus, the states had "staked out an entirely plausible theory of injury with the requisite specificity."

Increased costs. In addition, the states plausibly alleged that the final rule will increase their administrative and enforcement costs. The states asserted that they would need to rewrite current guidance that incorporates existing FLSA jurisprudence into explanations of state-law standards for joint-employer liability. They also alleged that the final rule would require them to expend more resources on the enforcement of state-law analogues of the FLSA. As the D.C. Circuit held in Air Alliance Houston v. EPA, "States have standing based on the Final Rule’s imposition of an increased regulatory burden on them." The same is true in this case.

Prudential standing. The prudential standing doctrine requires that a plaintiff’s complaint fall within one of the zone of interests protected by the law invoked. The touchstone of the inquiry is congressional intent. The zone-of-interests test asks whether the plaintiff has a valid "cause of action under the statute." The court determined that the states satisfied the prudential standing requirement. It noted that the APA’s judicial review provision is exceedingly broad, and that the states’ claim fell within the APA’s zone of interests.

The FLSA itself also supported the states’ prudential standing. The states alleged that the final rule will decrease their tax revenue by decreasing aggregate wages paid to workers in their jurisdictions. The states’ interest in protecting their tax base perfectly coincides with their interest in ensuring workers in their jurisdictions are compensated fairly. And that interest in protecting workers is exactly the sort of interest that the FLSA was enacted to protect.

Consequently, the States adequately alleged constitutional and prudential standing to challenge the joint employer rule, and the DOL’s motion to dismiss was denied.

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