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On September 8, 2020, a New York federal judge struck down a key part of the U.S. Department of Labor’s (DOL) new joint employer test that applied to vertical arrangements, but upheld the rule insofar as it applied to horizontal arrangements. State of New York, et al. v. Eugene Scalia, et al., No. 20-1689 (S.D.N.Y)

The Rule

On January 16, 2020, DOL implemented a Rule addressing two different potential joint employer scenarios—vertical joint employment (where one employer directly employs the worker but another simultaneously benefits from the employee’s work) and horizontal joint employment (where two employers each employ the worker for part of the same workweek). The Rule narrowed the federal joint employment test in both scenarios. 

  • With regard to the vertical joint employment relationship, the Rule adopted a four-factor balancing test, which was intended to determine whether the potential joint employer actually exercised control, directly or indirectly. The Rule also identified circumstances that would not meet the joint employer test. The new Rule departed from prior interpretations, which had eschewed technical concepts or control in favor of a more amorphous economic-reality standard.
  • With regard to the horizontal joint employer relationship, the Rule set forth factors to consider: 1) whether there is an arrangement between the employers to share the employee’s services; 2) whether one employer is acting directly or indirectly in the interest of the other employer in relation to the employee; or 3) whether they share control of the employee, directly or indirectly, by reason of the fact that one employer controls, is controlled by, or under common control with the other employer.

The Challenge

In February 2020, 18 states sued to block enforcement of the Rule. In a 62-page opinion, U.S. District Judge Gregory Woods concluded that the Rule’s “novel standard for vertical joint employer liability” violates the Administrative Procedure Act. He went on to state, “it conflicts with the FLSA because it ignores the statute’s broad definitions. And the Department failed to adequately justify its departure from its prior interpretations and to account for some of the Final Rules important costs. So the Final Rule is also arbitrary and capricious.” 

Nonetheless, the court found that the Rule’s changes to the horizontal joint employer test did not run afoul of the law because they made “only ‘non-substantive revisions’ to existing law for horizontal joint employer liability,” which can “function independently from the changes to vertical joint employer liability.”

What It Means

The standard set forth in the new Rule for identifying horizontal joint employment relationships remains in place. However, the standard set forth in the new Rule for vertical joint relationships has been struck down. One or more of the parties to this case will likely appeal the ruling. Accordingly, employers should be cautious when assessing whether a particular relationship may constitute a joint employment relationship under the Rule pending further developments.