Last week, a federal judge in the Southern District of New York struck down most of a U.S. Department of Labor rule that limited when multiple businesses may be liable to the same worker under federal wage law, the so-called “joint employer rule.” The decision undoes one of the Trump Administration key reforms of federal labor policy and is the latest chapter in the ongoing struggle over the reach of the Fair Labor Standards Act into critical areas of the economy such as franchising and businesses that utilize contract labor or staffing agencies.

The DOL issued the new rule in January of this year imposing a four-factor test for determining whether two or more businesses may be deemed as the employer for the same worker and liable under the Fair Labor Standards Act. The four-factor test limited joint employer liability to situations where the alleged employer actually exhibited control over an alleged employment relationship through things like hiring and firing, setting terms of employment, or directing the work at issue. Under the DOL’s rule, an alleged employer’s reservation of the right to take such actions is not sufficient.

A coalition of U.S. states challenged the new DOL rule. The court held that the DOL’s final rule violated the Administrative Procedures Act, a federal law designed to govern rule-making procedures. The court held, among other things, that the DOL failed to adequately justify why it was departing from prior guidelines on the same issue.

The Court vacated or struck down the rule’s application to "vertical" employment relationships in which workers for a staffing company, franchisees, or other intermediary are contracted to another entity. The Court, however, preserved the portion of the rule dealing with "horizontal" relationships. This includes situations in which a two separate, but “associated,” businesses “jointly” employ the same worker.

The ruling is the latest in a hard-fought battle over the scope of liability under federal employment law. The Obama administration sought to broaden the more employers accountable to workers. The DOL had most recently in 2014 and 2016 issued bulletins directing agency investigators to focus on the “economic realities” of the alleged employer/employee relationship. 

The business community, conversely, has urged the current administration to roll back such restrictions. The Court’s decision is a blow to that effort. The DOL rescinded the 2014 and 2016 bulletins after President Donald Trump took office in 2017. Then, in 2019, the Department proposed the first update to formal joint employment regulations in decades. 

The DOL or any number of business groups which had intervened in the suit could appeal the ruling who see such rulings and similar government regulation as attacks on their business models. Until the litigation is resolved, potential employers in “vertical” arrangements, e.g. staffing agencies, as described above seeking to avoid potential joint employer liability should look to the various and sometimes, conflicting court decisions in their respective jurisdictions for guidance.