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Earlier this year, the Department of Labor’s (the Department) new rule interpreting the definition of “joint employer” under the Fair Labor Standards Act (FLSA) became final. The Rule was the product of the Department’s efforts to create a clear definition of who qualifies as a joint employer. The Rule requires a joint employer to actually exercise control over certain conditions of a person’s employment. But while many employers welcomed the Department’s new Rule with a breath of relief, their reprieve may be short lived.
On September 8, 2020, a U.S. District Court in the Southern District of New York found that the Rule was invalid because of both its substance and the Department’s procedure for creating the Rule. Though the decision will likely be appealed, franchisors and other affected businesses could again face the uncertainty surrounding joint employer status that the Rule was meant to resolve. Particularly, the former standard that provided that only reserved or potential authority over employment conditions could establish joint employer status may again become the law.
For those especially interested in the Southern District’s decision, read further for a brief summary of the case:
On September 8, 2020, the Southern District of New York found that the Department failed to comply with the Administrative Procedures Act (APA), the law prescribing the procedural steps federal agencies must go through to make a new rule. Namely, the court found that the Rule is inconsistent with the FLSA’s definition of “employer” and that the Department’s promulgation of the Rule was “arbitrary and capricious.” Ruling in favor of the 18 States challenging the Rule’s validity, the court ordered that the portion of the Rule containing the new joint employer standard be vacated.
Initially, the court found that the Rule’s joint employer standard conflicts with the FLSA by requiring actual control for joint employer status. The Department based the Rule’s joint employer standard on the FLSA’s definition of “employer,” without regard to the FLSA’s definition of “employ” or “employee.” Because, according to the court, “all three definitions are relevant to determining joint employer status under the FLSA,” the Department erred by solely basing the Rule’s standard on the definition of “employer.” Additionally, the court considered prior decisions interpreting Congress’s intent behind the FLSA to broaden the scope of “employer” beyond that of the common law standard, which requires more control. Ultimately, the court found that the Rule’s standard was irreconcilable with Congress’s intent and the language of the FLSA, making the rule invalid.
The court also found that the Department violated the APA’s prohibition against arbitrary and capricious rule making. Namely, the Department failed to adequately address all of the concerns raised by the new joint employer standard and explain its decision to change course. While federal agencies have the power to change their rules, “the agency must at least display awareness that it is changing position.” Because, according to the court, the Department ignored its previous contrary interpretations and guidance, namely that actual control is not necessary for joint employer status, the Department’s promulgation of the Rule was arbitrary and capricious under the APA.
The Department and Intervenors in the case, which include numerous trade associations, such as the International Franchise Association, have until November 9, 2020, to file their appeal.
 The court separated the Rule’s new standard for determining vertical joint employer status from its “non-substantive revisions to existing law for horizontal joint employer liability” (emphasis added). Because the court found that the former was severable from the latter, only the Rule’s change to vertical joint employer liability was vacated as being “legally infirm.” This is particularly concerning for franchisors.
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